Case Scensario:
Admit it. You've watched that late-night infomercial describing how you can become a multimillionaire virtually overnight by leveraging your good looks and sparkling personality (and little else...) to invest in real estate. All joking aside, investing in real estate does present some opportunity for the creation of wealth, much like any other investment does. Taxation of rental real estate, however, does present some unique rules, and these rules can have a dramatic impact on the investor's realized gain or loss from the real-estate rental activity. As we outline the tax consequences, let's begin by describing the various capacities in which an individual can "own" and "rent" real estate. Asked differently, are there distinctions in the tax law that depend upon the manner in which the property is held or used, such as between those who rent real estate as a full-time business, and those who merely rent a vacation home? What are the rules that we follow in telling one type of rental property or rental ownership from another?