Hello and welcome to Moneygirls quick and dirty tips for a richer life.

Today's topic, how much can you deduct if you invest in real estate?

Investing in real estate offers ways to offset your earned income on your tax return.

If you own a rental property, all expenses directly associated with it, such as

mortgage interest, property taxes, maintenance and repairs, and travel to and from the rental

are tax deductible. You report these expenses on Schedule E. Plus, even

though a rental property is an asset that typically appreciates over the long term, the

tax code allows you to depreciate it.

This creates an additional expense that may also be deducted on your tax return.

Residential rental property is depreciated over 27.5 years or roughly 3.6% per year.

Only the value of the building and other improvements can be depreciated.

You can't depreciate the land because it doesn't wear out.

Let's take an example of a house that costs $200,000.

If 80% of the value is the structure and 20% is the land, the value of the structure would be $160,000.

The amount you could deduct for depreciation would be $160,000 divided by 27.5 years, or a little

over $5,800.

In many cases, the depreciation will create a passive loss on your tax return.

Real estate is considered a passive investment and generally speaking passive losses

may only be deducted against passive income.

But the tax code allows an exception.

You can deduct up to $25,000 in passive losses against your active income, that is your income from working or from dividends,

if you meet the requirement for active participation.

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