How Married Landlords Can Save On Taxes

By: Huntsville Real Estate Expert Mike Manosky On May 15, 2015

Below are highlights from an article in Inman News. Stephen Fishman, tax expert, attorney, and author contributed the article. Here’s why married landlords need to be very careful about deciding to file taxes separately or jointly…

piggy bankFiling taxes separately can sometimes save married landlords money. However, the vast majority of the time, it’s best for them to file jointly.

Take the case of Julie O. who owned a rental property that incurred a $29,583 loss. She and her husband filed separate tax returns. When IRS audited Julie, they denied her rental loss. Julie claimed she qualified as a real estate professional, which entitled her to an unlimited deduction for rental losses.

However, the IRS denied the deduction because she did not meet the qualifications for being a real estate professional by IRS rules. To qualify a person must…

  1. spend more than half (at least 51%) of his or her total working hours during the year working in one or more real property businesses
  2. spend more than 751 hours a year in one or more real property businesses
  3. materially participate in the rental activity and any other real property businesses used to pass the 51% and 751-hour tests.

Julie worked full time for a real estate investment company. However, she was an employee and failed the ownership test. If you are an employee in someone else’s business, you must own more than 5% of the business to claim status as a real estate professional. Julie failed the test.

Julie argued that her spouse met the 51% and 751-hour tests and, therefore, she satisfied them too because his efforts were attributable to her as his spouse. In fact, that can be true…but only if the spouses file their taxes jointly! Julie at least satisfied the third rule for “material participation,” but she was denied the deduction for failing the first two tests.

Filing taxes jointly would have remedied the entire situation. If Julie and her husband had filed a joint tax return, his time qualifying as a real estate professional would have been attributable to her and the IRS would have allowed the deduction.

There are often very good reasons to file taxes separately, but in the case of married landlords, it is usually advantageous to file taxes jointly.

Visit Stephen Fishman’s website for more information. And don’t forget you must seek professional tax advice about your specific circumstances.

Information courtesy of Huntsville Real Estate Broker Mike Manosky.


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