Rental real estate can generate non-cash losses through depreciation of its building and improvements as well as accruing interest on mortgages it may have.   If the property is owned by a limited partnership these losses are passed through to the individual partners in the partnership on their K-1.  

Prior to 1986 any individual could use these real estate losses to offset any type of income on their tax return.    The Tax Reform Act of 1986 changed the tax laws so that the losses from real estate, which are considered passive, could only be used to offset passive income and thereby limited the value of the losses to most individuals. 

The losses, however, can still be of great value to an individual who the IRS considers to be a Real Estate Professional (REP).  The losses are considered active for an REP and therefore the losses may offset virtually any type of income to that individual and provide significant tax savings.   To qualify as an REP you must meet both of the following requirements:

  • More than half of the personal services you performed in all trades or businesses during the tax year were performed in real property trades or businesses in which you materially participated.
  • You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated.

These losses are especially beneficial to an REP in a high tax bracket, and even more so  if he lives in an area with high State and City income tax rates, for example New York city. The limited partnership, through its partnership agreement,  can be structured in a way that certain investors will receive the real estate loss benefit, while other investors, either in the partnership or otherwise involved in the transaction, usually as a mortgage holder, will receive most of the economic benefit. This could cut your income taxes by almost half!

To find out more, contact