You are correct in that your rental property losses should not be offsetting your ordinary income because you are not a real estate professional. Moreover, you indicated that your AGI was over $150,000, which means you are above the income threshold for deducting such losses based on the active participation test. Losses from rental property are considered passive losses and can generally offset passive income only (that is, income from other rental properties or another small business in which you do not materially participate, not including investments).
While we do not know your specific situation, it may be helpful to mention this aspect of being a real estate professional. A taxpayer may be a real estate professional if their spouse qualifies for the 750-hour test. In such a case, both spouses’ time on the rental properties count toward material participation, and losses can then be taken against either spouse’s income. This is a great strategy for couples where one spouse works in a real estate trade or business, works only part-time, or not at all.
One option to consider here is whether you have any carryover capital losses (from sales of stock that resulted in a loss) from prior years that are offsetting your current income. Capital losses from the sale of stock can offset capital gains, and up to $3,000 of ordinary income. Any capital loss that is left over in a given year is suspended and carried over to the next tax year and each succeeding year, and applied in the same fashion, until the capital loss is eliminated. So it could be that other losses rather than your rental property losses, are offsetting your ordinary income.
It appears you are able to review the items on your Schedule E, thus we will assume that you are using the TurboTax CD/download version. In that case, is there an "X" in the boxes for Active Participation and Material Participation on your Schedule E Worksheet? If yes, then that may be the reason why your rental property losses are offsetting your ordinary income.
Lastly, review your answers to the questions in the Rental Properties and Royalties section under Wages & Income. The first questions you will see in Rental Properties relate to whether you spend more than 750 hours per year in real estate activities or whether you spend more than 50% of your work-related time in real estate. Make any necessary changes.
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