However, the tax law says real estate attorneys and mortgage brokers cannot qualify for unlimited tax deductions from their investment properties. That means you must make at least the major decisions about managing your property, such as setting rents, approving new tenants and making major expense decisions. However, you need not be involved in the daily details, such as collecting rents and evicting deadbeat tenants. If you are a ''real estate professional'' who spends at least 750 hours a year, or more than 50 percent of your working time, in real estate activities, and you materially participate in managing your properties, then there is no limit to your tax shelter deductions from your realty investments. The reason is, after claiming their income tax savings from deductions, they will usually show a paper profit.
Depreciation is a noncash bookkeeping deduction for estimated wear, tear and obsolescence.
Although the property is probably appreciating in market value, depreciation tax deductions are allowed for investment properties. Residential rental properties must currently be depreciated over 27.5 years on a straight-line estimated useful life. Commercial properties require a 39-year depreciation schedule. To illustrate, if you own a vacation condo in a resort ''rental pool,'' managed by on-site professionals, you don't qualify since you aren't involved in daily management decisions. However, if you must be consulted by the property manager to set the rent, approve tenants and make repair decisions, then you materially participate.