Topic 07 · 7 min read
The Rules That Decide If You Can Use Them
Earning a credit and using a credit are two different events.
Real estate credits run into the same wall that real estate losses do. Rental activity is usually passive, and credits arising from passive activities can generally only offset the tax on passive income. Add at-risk limits, the general business credit ordering rules, and the alternative minimum tax, and it becomes ordinary for an investor to hold a large credit they cannot touch this year.
What to know
- Passive credits need passive income
- Unless an exception applies, a credit from a rental offsets only the tax attributable to passive activities, not your salary.
- The general business credit stack
- Most of these credits combine into one general business credit with its own limit, ordering rules, and a carryback and carryforward window.
- At-risk rules come first
- You cannot claim benefits beyond what you genuinely have at stake in the activity.
- Exceptions exist
- A limited special allowance for actively managed rentals, and real estate professional status, can turn otherwise passive credits into usable ones.
The tax benefit
Planning income and participation deliberately is what turns a paper credit into cash saved.
Worked example
A stranded credit
An investor with a $60,000 solar credit and no passive income uses none of it in year one. After buying a profitable rental the following year, the carryforward finally starts releasing.
Watch out for
- Carryforwards expire; long-dated credits can die unused.
- Grouping elections change which activities count as one, and they are hard to undo.
- Partnership agreements decide how credits are allocated among partners.
Terms from this topic