Apartment investments still provides the opportunity to easily qualify as an active participant. In doing so, qualified investors can deduct up to$25,000 per year against salaries and other nonpassive income. You’ll notice that I said “qualified investors.” That’s because there are five basic conditions that must be met to qualify for this real estate write-off for investors buying apartment buildings:
1. The person seeking the write-off must be an individual taxpayer. Corporations and limited partners do not qualify. The IRS considers a married couple filing jointly to be an individual, so a husband and wife can share the write-off. Tenants-in-common form of ownership meet this requirement.
2. The property must be a real estate rental activity. That is, its primary purpose must be that of a rental. Apartment investments qualify beautifully.
3. The individual must own a minimum of 10 percent of the apartment investment at all times. A husband and wife can own 10 percent combined and still qualify because they’re considered to be an individual by the IRS. An individual may own more than 10 percent, but not less.
4. The maximum write-off of $25,000 is phased out when adjusted gross income (AGI) exceeds $100,000. The phase-out is $2 for each$1 of AGI over the minimum of $100,000 for married tax payer filing jointly. This exemption is unavailable once AGI reaches$150,000.
5. The individual must be considered an active participant. Participation standard requires only that the individual participate (in a significant and bona fide manner) in the making of management decisions or arranges for others to provide services. Examples of management decisions would include setting rental rates and terms and approving capital and repair expenditures. A management company can handle the day-to-day operations as long as the owner makes the major decisions.
It is difficult to get this deduction owning real estate other than apartment buildings. The tax codes have specially questioned whether triple-net lease arrangements found in shopping centers, office buildings, and industrial parks meet these requirements. Multi family investments fully comply because rents are generally on a gross not on a triple-net basis.
Whenever you can get the IRS to underwrite your real estate investment, you’ll be money ahead. When you apply this strategy, you’ll be working with what is known as “soft dollars.” This simply means that the IRS is paying for your real estate investment, and the “hard dollars” (your own money) ex-pended will be fewer. Never forget, however, the IRS has the divine authority to broadly interpret the real estate tax strategies but they reserve this consecrated right to draw diverse conclusions.