Owning Several Homes
Can Be Quite Taxing

Question: I own two duplexes and have considered buying a third before buying a single-family home. I enjoy the cash flow and equity, and I save money by maintaining the properties myself. For tax purposes, is it better to own two or three properties before buying a house? I have heard that owning too many properties can make you lose out when it comes to taxes. Also, what is the best way to gauge how long I should hold a property?

-- Richard, Austin, Texas

Richard: I have never heard that you could lose out by owning too many properties. However, if your income increases beyond a certain point ($150,000), you will no longer be able to deduct paper losses caused by depreciation on investment property from your ordinary income. Check with your accountant for details on the Internal Revenue Service's active/passive rules.

Also, there's a point where you own so many properties -- but not enough to afford professional help -- that management becomes a headache. With just three duplexes, however, you'd still be a long way from there.

Judging how long to hold property is difficult. The age and condition of the property, and your age as well, are important factors to consider. Most investors like to hang on to relatively new properties that perform well. As the properties get older and require more maintenance, the tendency is to sell. Of course, if you have problems finding tenants or charging rents high enough to cover your expenses, you will want to dump the property as soon as possible. The rule is to get rid of alligators -- properties that eat you alive with expenses -- and keep cows -- properties that can be milked for positive cash flow.

Mr. Irwin has more than 25 years' experience as a Los Angeles-area real-estate broker. He is the author of more than two dozen books about real estate and is recognized as one of the most knowledgeable writers in the real-estate field. Mr. Irwin's most recent book is "Power Tips for Buying a Home for Less," (McGraw-Hill, 2000).

Submit your question about residential real-estate and home-improvement issues to RealEstateJournal. Please include your first name, city and state. Due to volume of inquiries received, Mr. Irwin may not be able to respond to all questions.

Email your comments to rjeditor@dowjones.com.