Chapter 31

Tax Savings for Investors in Real Estate

Real estate investors may take advantage of the following tax benefits:

• Gains on the sale of investment property may be taxed at capital gain rates.
• Depreciation can provide a source of temporary tax-free income (31.1).
• Rental income can be used to offset passive losses Chapter 10.
• Tax-free exchanges make it possible to defer tax on exchanges of real estate held for investment (31.3).

Losses on real estate transactions may be subject to the following disadvantages:

• Rental losses may not be deductible from other income such as salary, interest, and dividends unless you qualify as a real estate professional or for the special $25,000 rental loss allowance under the passive loss rules Chapter 10.
• Compromises of mortgage liability may subject you to tax (31.10).

A foreclosure or repossession is treated as a sale on which you realize gain or loss. In addition, if you are personally liable on the loan and the amount of debt cancelled in the foreclosure exceeds the fair market value of the transferred property, you will owe tax on cancellation of debt income unless an exception is available (31.9).

31.1 Real Estate Ventures

31.2 Sales of Subdivided Land—Dealer or Investor?

31.3 Exchanging Real Estate Without Tax

31.4 Timing Your Real Property Sales

31.5 Cancellation of a Lease

31.6 Sale of an Option

31.7 Granting of an Easement

31.8 Special Tax Credits for Real Estate Investments

31.9 Foreclosures, Repossessions, Short Sales, and Voluntary Conveyances to Creditors

31.10 Restructuring Mortgage Debt

31.11 Abandonments

31.12 Seller’s Repossession After Buyer’s Default on Mortgage

31.13 Foreclosure on Mortgages Other Than Purchase Money

31.14 Foreclosure Sale to Third Party

31.15 Transferring Mortgaged Realty