In
order to be able to deduct passive rental losses against ordinary income, you
will need to be an active participant in your rental activities (screenshot #1)
and your investment in your rental property needs to be considered
"at-risk" (At-risk limitation rules limit any deductions to the
amount of money that the taxpayer actually had at-risk at the end of the tax
year).
Any unused passive losses in the current year will carryover to offset future year passive income.
If you
are an active participant in your rental activities (you do your rental
activities (ie: collect the rent) as opposed to a management company doing all
these activities), the IRS allows for $25,000 of passive rental losses to
become available each year to offset ordinary income. This offset may not pertain to claiming a loss related to home office expenses which are limited to rental income only.
The ability to use this $25,000 of passive rental
losses is phased out at a certain income level. 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
(MAGI) that is more than $100,000 ($50,000 if you are married
filing separately). If your modified adjusted gross income is $150,000 or more
($75,000 or more if you are married filing separately), you generally cannot
use the special allowance. (See screenshot #2 for how to calculate your MAGI)
For more information on rental income and expenses,
including passive activity loss limits, refer to IRS Publication 527 and Publication 925, Passive Activity and At-Risk Rules.
