Investors & landlords

Yes, you can take a credit/deduction meeting certain qualifying factors and it would count to make credits/deductions against W2 non passive income on taxes you may owe, only if you meet certain requirements.

Per IRS:

Special $25,000 allowance 

If you or your spouse actively participated in a passive rental real estate activity, the amount of the passive activity loss that’s disallowed is decreased and you therefore can deduct up to $25,000 of loss from the activity from your nonpassive income. This special allowance is an exception to the general rule disallowing the passive activity loss. Similarly, you can offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception.

If you’re married, filing a separate return, and lived apart from your spouse for the entire tax year, your special allowance can’t be more than $12,500. If you lived with your spouse at any time during the year and are filing a separate return, you can’t use the special allowance to reduce your nonpassive income or tax on nonpassive income.

The maximum special allowance is reduced if your modified adjusted gross income exceeds certain amounts. See Phaseout rule, later.

Example.

You are a single taxpayer. You have $70,000 in wages, $15,000 income from a limited partnership, a $26,000 loss from rental real estate activities in which you actively participated, and you aren’t subject to the modified adjusted gross income phaseout rule. You can use $15,000 of your $26,000 loss to offset your $15,000 passive income from the partnership. You actively participated in your rental real estate activities, so you can use the remaining $11,000 rental real estate loss to offset $11,000 of your nonpassive income (wages).

Important keep in mind: Please see Publication 925 for 2022 for requirements and general information on (non)passive Income. I did an example with a W2 employee who had taxes due, and after entering expenses on schedule e for short term rental, it decreased taxes owed and increased refund based upon the steps outlined.

One way to do so:

• Type "Schedule E" and click the jump to blue link to take you to the form that asks if you had rental or royalty expenses in 2022?
• Answer Yes, if it applies.
• For real estate professional, answer none of the above if it applies. Click continue. (Sounds like your a W2 worker too)
• Is this a rental property or royalty? Select rental property and enter description.
• On what type of rental is it, you must choose Vacation or short term, if this applies. Click continue and select all that apply.
• When you get to was this property rented for ALL of 2022, answer no if that is the case or yes. Enter number of days rented and personal use days.
• Property ownership if you owned 100% or not, if not you would have to allocate expenses to others.
• You must be an active participant to qualify for this credit/deduction.
• Enter 1099-NEC generated from property, or select no.
• Where you enter rental info for you, you can import from Quicken, QuickBooks, TXF file, or enter yourself. Select enter yourself if this applies, or import.
• If your property was in any designated areas? Select none of the above if they do not apply.
• Then it will ask you questions about being your property in the past, please answer.
• How did you acquire property? Please answer.
• If you answer I bought this rental or it was inherited, for example: Next it will ask you to gather important documents such as purchase paperwork, improvements, basis information, etc. Click continue you will need purchase price, rental available date, and purchase date, escrow fees, and any seller-paid points on the next few pages if you selected I bought this rental. These pages will calculate your depreciation.
• Once you get to the review "Your ________  Rental Summary", you are good to go and enter income/expenses like real estate taxes.

@EricUT03