I'm seeing a lot of articles this morning about political discussion regarding a "real estate loophole" though none of the articles actually say what this loophole is and the only one that I'm aware of is the mortgage deduction tax benefit. However, one politician is wanting to close this loophole?

Does anyone know what this loophole is?

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3 Answers 3


Real estate professionals are able to apply any losses (in most cases due to depreciation) to their entire federal tax obligations, personal or professional.

If you own an investment property, but are not working in real estate, your investment's losses can be applied to your tax obligations for that property only, not your overall tax liability.

  • I notice this says "personal or professional", does that mean you can only apply it to one? And for that matter, does it also mean you can't apply the whole deductible to both?
    – Zibbobz
    Commented Oct 12, 2016 at 16:30
  • Joe has the detail below. Sorry for the lack of specificity.
    – Aias
    Commented Oct 12, 2016 at 22:52

Aias's first line is correct --

Real estate professionals are able to apply any losses (in most cases due to depreciation) to their entire federal tax obligations, personal or professional.

The rest can use clarification. The non-professional can deduct up to $25K in real estate loss against ordinary income so long as their adjusted gross income is under $100K. The $25K deduction phases out from AGI of $100K to $150K, where no deduction is allowed, but the losses carry forward. Ultimately, when the property is sold, those losses will offset recaptured depreciation, a phantom gain many property owners see upon selling.

(Added in response to comment)
The 1031 exchange is another real estate friendly bit of the tax code. It allows an investor to sell one building and buy another without paying gains in the sale. Basis, including depreciation taken, are just shifted to the new building. (Note, this is no longer allowed for one's residence. Instead, the exclusion of $250k single or $500k for a couple, was added to the code. This was a benefit both to the elderly folk selling the house to go rent or the younger people who were moving to an area having much lower cost of living).

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    Some observers might consider a 1031 exchange to be a real estate tax "loophole" as well.
    – user662852
    Commented Oct 12, 2016 at 14:57
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    @user662852 I actually was assuming this was the loophole when I saw the title. It's far more of a "loophole" than deducting business losses, which is how all business losses work.
    – enderland
    Commented Oct 13, 2016 at 23:17
  • Request for clarification: how is "real estate professional" defined? Wondering whether an agent could benefit from this.
    – keshlam
    Commented Oct 16, 2016 at 2:23
  • The individual must spend 750 hours/yr or more involved in the business, and it must be more than half one's working time. i.e. It would be nearly impossible to do it as a second job if first is regular 2000 hours/yr. Commented Oct 16, 2016 at 2:42

My understanding of the current political real estate tax loophole is the ability to carry forward to future years any real estate loss in a particular year, to offset, and shelter from tax, any profits in future years, for up to 18 years.

This actually makes a certain amount of sense. If your total profit over a period of time is zero, you could argue that you shouldn't pay any taxes, As such, it's a feature, not a loop-hole.

The danger comes from someone finding a way to work this system in ways unintended by the IRS...

  • +1 I appreciate the objective tone of the answer. My only observation - The IRS is just the enforcer, it's the US congress that writes the regulations. Commented Oct 14, 2016 at 12:44

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