January 23, 2014

Limits on Rental Property Income Tax Loss Deductions

You may have heard that rental properties can have some good tax deductions.    One of the major deductions is the depreciation of the property which can add up to a lot of money.    So owning rentals can be advantageous from a tax perspective.   However you may not know that there are limits on how much you can deduct in rental losses or if you can even deduct a loss at all.

We actually ran into this ourselves last year on our taxes.   We had about $9000 total loses that exceeded the amount we were allowed to deduct for the year.

Hows this all work then?    The article Can You Deduct Your Rental Losses? from NOLO covers the topic pretty well.    I'm not going to reinvent the wheel here by rewriting their whole article.   I'd recommend you read the NOLO article yourself.

I'll summarize quickly though: 

  • There is a $25,000 limit on passive losses that you can deduct.  Generally rentals are considered a passive income.   Maybe you don't think its 'passive' considering the amount of work you do but it is in that category according to the IRS.    
  • However if you make over $100,000 MAGI for a couple then that $25,000 deduction limit is phased out.   Above $150,000 and you get no deduction for losses.    Keep in mind the losses we're talking here are the net number out of a Schedule E so it means your total rent minus all expenses.   
  • Real estate professionals get an exception.  To qualify you have to work minimum 751 hours in the year in the real estate business and materially participate in running your properties.

But all is not lost.   For any loss you're not allowed to deduct you can carry it over into future years.   The IRS says: "Generally, losses from passive activities that exceed the income from passive activities are disallowed for the current year. Disallowed passive losses are carried forward to the next taxable year."


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