Buy, Sell & Rent - Page 5 of 6

Buy, Sell & Rent

should have commercial insurance, not a typical homeowner’s policy.”

Insurance might not cover everything, though. For added protection, Portman suggests creating a limited liability company to own your rental property, rather than owning it personally. “If the property is owned by an L.L.C.,” she says, “your personal assets won’t be exposed. If you have multiple properties, you might want an L.L.C. for each one, so any damages attributed to one property won’t cost you the others. However, you should check on state tax laws and the costs of owning multiple L.L.C.s.” Portman notes that you can set up a series of L.L.C.s in Delaware with one filing, even if your rental properties are in other states.

No matter how much legal protection you have in place, though, you still must have conscientious tenants paying reasonable rents to come out ahead as a landlord. “To succeed,” says Arvai, “you need the four Ts: time, training, tools, and temperament.” If you can cope with tenants, toilets, and trash, you may wind up with enough cash for tennis, travel, and Treasury bonds.

When your accountant tallies the results of your real estate rental property each year, you may have a loss, for tax purposes. Even if your cash income exceeds your outlays, non-cash deductions such as depreciation may provide a tax loss. If so, any cash flow you receive will be untaxed.

The question, though, is whether you can deduct such a tax loss on your personal return. “You might,” says Larry Torella, tax partner at Eisner L.L.P., a New York accounting firm, “depending on several factors, especially your adjusted gross income (AGI).”

Generally, these types of losses (passive losses, in tax code parlance) are deductible, up to $25,000 per year. “In order to take the full $25,000 deduction,” says Torella, “your AGI must be no more than $100,000 per year. Over $100,000, this deduction is phased out, $1 for every $2 over the threshold, until it disappears altogether at $150,000 in AGI.”

Suppose, for example, John Smith has a rental property that turns in tax losses, year after year. This year, John’s AGI is $98,000. He can deduct losses up to $25,000.

Next year, John’s AGI climbs to $120,000. He’s $20,000 over the cutoff, so his maximum loss is cut by $10,000. That year, he can deduct up to $15,000 worth of losses from his rental property.

The following year, John’s AGI reaches $152,000. Now, he can’t deduct any losses. What happens to losses that John can’t deduct right away? “They’re carried over to future years,” says Torella. “They can offset any taxable income from rental properties. Eventually, when the properties are sold, any unused losses will reduce the taxable gain from the sale.”

The laws are more favorable if you spend so much time as a landlord that you get to be treated as a real estate professional. “If you spend more than half of your working time on real estate — at least 750 hours a year — you’re entitled to deduct any losses right away,” says