Real estate investment may focus on potential appreciation. But real estate market is in such uncertainty that it is impossible to kown know if or when appreciation in value will come. Wise investors are most interested in cash flow.
A rental property investor will collect rent checks, pay the bills, and watch their bank accounts. But the cash flow may not be that simple with consideration of tax issues on income and loss from the rental property.
Losses on Rental Property
When your expenses from a rental property exceed your rental income, your property produces a net loss. This situation often occurs when you have mortgage interest, depreciation deduction and cash expenses. The IRS has limit the loss deduction.
Passive Loss Rules
Property rental is a passive activity and subject to IRS passive activity loss rules. When you incur a real estate rental loss, the IRS considers the loss passive unless property management is your primary income-earning activity.
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