Real Estate Investment Tax Benefit Simulator

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Real Estate Tax Benefit Simulator

Can You Deduct Your Real Estate Losses?

Stop guessing about the complex U.S. Passive Activity Loss (PAL) rules. Simulate your potential deduction based on your income and participation level, and find your optimal tax strategy.

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$25,000 Special Allowance Calculator

This is the most common exception, applying to most small-scale rental investors. See how your Modified Adjusted Gross Income (MAGI) affects your deduction.

1. What is your Modified Adjusted Gross Income (MAGI)?

$115,000

2. What is your total rental property loss for the year?

$25,000

I **actively participate** in my rental activity (e.g., approve tenants, authorize repairs).

Your Maximum Deductible Loss

$20,000

You can deduct this amount from other income, like wages, to reduce your taxes.

Losses carried forward: $5,000

The chart shows how the special allowance gradually decreases as MAGI exceeds $100,000.

Real Estate Professional (REP) Qualifier

This is the ultimate strategy for high-income investors to deduct unlimited losses. Check if you meet the two key requirements for REP status step-by-step.

1

Requirement 1: The Time Tests

Enter the hours you've invested in real property trades or businesses.

How many hours did you spend in real property businesses (rentals, development, brokerage, etc.) this year?

How many total hours did you spend in ALL personal services (real estate + other jobs) this year?

My spouse meets the above tests (for joint filers).

2

Requirement 2: The Material Participation Test

Now that you qualify as an REP, you must prove you materially participated in your rental activities.

You must meet at least one of the following:

You participated for more than 500 hours.

You participated for more than 100 hours, and that was not less than the participation of any other individual.

Your participation was substantially all the participation in the activity of all individuals for the tax year.

These are the most common tests; four others exist. All participation must be proven with a contemporaneous time log.

Advanced Tax Strategies

Explore additional tax-minimization strategies for investors who don't qualify as REPs or are in special situations.

An activity with an average customer use of 7 days or less (e.g., an Airbnb) is NOT considered a "rental activity" under the tax code. This means it escapes the "per se passive" rule.

Strategic Implication: Without needing REP status, you can deduct losses against your W-2 income if you "materially participate" in the STR business (e.g., by spending >100 hours and more than anyone else). This is a powerful strategy for high-income professionals.

The Pro: You can combine the hours spent on multiple properties to more easily meet a material participation test (e.g., 500 hours) for the entire group.

The Con: Once grouped, you can't deduct suspended losses from one property when you sell it. The losses remain "trapped" until you dispose of ALL properties in the group. This election is hard to revoke and requires careful consideration.

The Gist: California does NOT recognize the federal Real Estate Professional (REP) exception. For California tax purposes, all rental activity is always passive.

The Impact: Even if you fully deduct your losses on your federal return as an REP, those deductions will be disallowed on your California state return, potentially creating a significant state tax liability. This must be factored into any investment in California property.

© 2025 Interactive Tax Guide. All Rights Reserved.

This simulator is for informational purposes only and does not constitute tax or legal advice. Please consult a qualified tax professional for advice tailored to your specific situation.