It's tax planning which helps you prepare and decide what action to take. If you rent real estate property at a loss it is considered a passive activity with special rules. A passive activity loss can be taken up to $25,000 a year if the income qualifications are met. If the income is too high then the loss is carried over until used up or until the property is sold at which time the entire loss is deductible.
Phaseout Rule: The maximum special allowance of $25,000 ($12,500 for married individuals filing separate returns and living apart at all times during the year) is reduced by 50% of the amount of your modified adjusted gross income that’s more than $100,000 ($50,000 if you’re married filing separately). If your modified adjusted gross income is $150,000 or more ($75,000 or more if you’re married filing separately), you generally can’t use the special allowance. This is because the special allowance is reduced to $0 since the modified adjusted gross income is over the $100,000 amount.
If you choose to convert the property to personal use, then the depreciation will still need to be recaptured when the property is sold. You will need to retain your records until you sell the property. Likewise the suspended passive activity losses (PALs) can be use in only two circumstances:
- Against passive-activity income
- When you dispose of the passive activity in a fully taxable transaction to an unrelated party
When you convert rental property into a personal use home. The rental home may have suspended passive-activity losses. You can continue to deduct the suspended passive-activity losses from other passive income. If you have no other passive income, the suspended losses remain suspended. Carry them forward until you sell the home in a fully taxable transaction.
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