Does TurboTax reflect that your spouse is a Real Estate Professional (assuming your spouse is a REP)? As a Real Estate Professional, the losses would not be passive losses. If the Real Estate Professional status does not apply, does your spouse meet the active participation rules. Generally, the active participation rules allow those in a real estate activity to offset up to $25,000 of rental losses each year against non-passive sources. There are limitations, of course, and the key to qualifying is the requirement to "actively participate" in the rental activity.
Here is the formula for determining whether, under the active participation rules, you can deduct some of your losses. If modified adjusted gross income (Modified AGI) is above $100,000, the $25,000 limit is reduced according to the formula (Modified AGI - $100,000) X 50% = AMOUNT REDUCED BY. For example, if Modified AGI is $130,000, the deduction would be REDUCED BY ($130,000 - $100,000) X 50% or $15,000. The deduction would then be $10,000 ($25,000 - $15,000). The benefit is lost entirely if Modified AGI reaches $150,000.
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