Understanding Suspended Losses: Real Estate Tax Strategies

In this episode of How to Lower Your Tax Bill, host Terrence Hutchins dives into suspended real estate losses—what they are, why they happen, and how to unlock them for tax savings.

What You’ll Learn:

• What Are Suspended Losses? How the 1986 tax law introduced passive activity loss rules and how they impact real estate investors.
• Income Thresholds for Deductions:
  • If income is below $100,000, up to $25,000 of losses can be deducted.
  • Between $100,000 - $150,000, the deduction phases out.
  • Above $150,000, losses are suspended and carried forward.
• Strategies to Unlock Suspended Losses:
  1. Lowering Taxable Income: 401(k) contributions and other deductions to stay below $150,000.
  2. Generating Passive Income: Offset gains from real estate partnerships or short-term rentals.
  3. Becoming a Real Estate Professional: Meeting the 750-hour rule to deduct losses in the current year.
  4. Selling a Property: Unlocking losses upon the sale of an individual property.
  5. Grouping Election Strategy: Combining multiple properties to meet material participation rules.

Featured Tax Case: May vs. Commissioner (2005) – A real estate investor lost deductions due to failing to elect property grouping. This case highlights the importance of properly documenting participation and making necessary tax elections.

For more tax-saving strategies, subscribe to How to Lower Your Tax Bill on Spotify or Apple Podcasts. Have questions? Email [email protected] and we’ll address them in a future episode. The key to tax planning is not just reducing your bill—it’s keeping more of what you earn.