If you are actively managing your rental property, you are allowed to claim deductions for all of your rental expenses. So if you report a loss from operating rental properties, that loss reduces your overall tax liability. 

For example, if you also earn a salary, you might end up owing considerably less in taxes because you own rental property. Before going on, an important note must be inserted. First, tax laws are likely to change at any time. The general rules and guidelines provided here should be used as a starting point in developing your tax strategy. Deductions for investment losses are also limited in a number of ways, so you will need to consult with your tax adviser to ensure that the deductions you claim on your tax return comply with current law and regulation.

The Taxpayer Relief Act of 1997 made significant changes to the law regarding treatment of the sale of primary residences. These changes do not apply to rental properties. However, they bring up some interesting strategies. Because you are allowed to switch a primary residence into a rental, and vice versa, some long-term planning could help you to legally avoid or defer taxes on gains (both on your primary residence and on rental property).

Real estate investors enjoy several benefits not available to others. Collectively, these benefits make real estate one of the best investments when tax liabilities are an important consideration. By designing a package of benefits for real estate investors, the Congress has recognized the many economic benefits that are derived from real estate investing, not only regionally but for the entire country.

These benefits are explained in more detail later in this article. By way of providing an overview, the following summarizes the main benefits:

• You can defer lax liability on the profit from selling investment property often indefinitely; and by timing a sale carefully, you can also completely control when you recognize capital gains.

• Ordinary and reasonable expenses connected to real estate are deductible as investment expenses, including interest, property taxes, utilities, insurance, maintenance, supplies, legal fees, and others.

• You can claim depreciation of buildings and other improvements, which greatly increases your deductions and reduces tax liabilities.

• You can refinance property debt and take out cash even if the amount taken out is higher than your original investment without being taxed.

You will probably need professional tax help not only to ensure that you claim all the deductions to which you are entitled, but also to make sure you follow all of the rules. The federal income tax rules are complicated to the extent that most people are overwhelmed by the process of annual reporting. When you add special schedules for real estate, including calculations not usually performed, the task is even more daunting. As a real estate investor, you will need to fill out several schedules you would not use otherwise. A professional tax expert who knows the rules can help you comply, freeing up your time and energy to manage your investments, rather than worrying about paperwork and the federal tax code.

Don't overlook the importance of tax planning. Review your status throughout the year to anticipate future tax liabilities and identify actions you can take now to legally reduce taxes. It is perfectly legal to time decisions to reduce taxes, but if you wait until next April, it will be too late. A competent tax professional can help you by identifying the actions you can take today¡ªor put off until tomorrow¡ªthat will help you to better plan and manage your tax liability.

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