Estimated tax tip savings. Owning rental properties can generate significant paper losses against your other income. To get this favorable treatment, you need to successfully navigate the passive loss rules and avoid the investor trap.

Before the 1986 Tax Reform Act, many rental properties were effective tax shelters. In 1993, lawmakers passed a new rule that reinstated the tax shelter possibilities, but only for those taxpayers who qualify as tax-law–defined “real estate professionals” and who materially participate in their properties.

Let’s say that your tax return shows $190,000 in adjusted gross income before considering your $30,000 in losses from your rental properties. What does it take to deduct that $30,000 and put the savings from that deduction in your bank account today?

First, you or your spouse needs to qualify as a tax-law–defined real estate professional for the year.1

Second, you have to materially participate in the rentals for which you are deducting the losses. (Note, if you are married, you and your spouse can work together to meet this requirement.)2

Both tests make you count your hours and type of involvement. The type of property has a big bearing on your involvement, and that in turn has a big impact on your ability to deduct your rental losses. ... Log in to view full article.