WHY for 2019 do I not get to deduct my Residential RENTAL Property loss??
First, understand there is a difference between "active participation" and "material participation".
Active participation is a way of working that supports an individual's right to participate in the activities and relationships of everyday life as independently as possible. The individual is an active partner in their own care or support rather than being passive. (I.e. You do not actually have to "do something" on a recurring basis to earn the money. An example would be rental or royalty income.)
Material participation in an income-producing activity is, generally speaking, an activity that is regular, continuous, and substantial. Income-producing actions, in which the taxpayer materially participates is an active income or loss. (I.e. you actually "do something" on a regular basis to "earn" the money.)
When it comes to long term residential rental real estate, it's not all that common to show a taxable profit "on paper" at tax filing time. It's more common to show a loss every year. That's because when you add up the amount of depreciation you are required to take by law, with the mortgage interest, property taxes, property insurance and other allowed rental expenses, those expenses will most likely exceed the total rental income for the tax year. So you have a loss.
Since rental income is passive, so are rental expenses. If you do not materially participate in the rental activity, your passive rental expenses can only be deducted from your passive income. Once your rental expenses get your taxable rental income to zero, if you are not an "active participant" then that's it. You can't deduct from any other "ordinarly" income, such as W-2 income. The excess loss just gets carried over to the next year.
Therefore, your carry over losses will continue to grow with each passing year. You will not be able to "realize" those losses until the tax year you sell the property. In that tax year you "will" be able to claim those excess losses against other ordinary income.
Now with rental property, if you are an "active participant" in the management of the property, you can deduct up to a maximum of $25,000 from other ordinary income. But it depends on other things such as your AGI and if you actually have any "other" taxable ordinary income to claim the loss against.
When it comes to determining if you are an active participant, for most (but I stress, NOT ALL) it's relatively simple. If you are the one who makes or participates in making management decisions, then you actively participate. For example, if you are the one who decides who the property will be rented to, or you are the one to decides which contractor will be paid for work done, and approve the amount being charged.
But if you contract with a property management company and empower them to make all the decisions, then most likely you do not actively participate in the management decisions. It would depend on the terms of the contract between you and the management company.
With active participation it's perfectly possible to not have a carry over loss. It's also perfectly possible to always have a carry over loss. It just depends on the rental income to expense ratio each year.
