How to Claim losses on Rental Property

[nermin-seferagic]

I bought an 8 unit apartment building in January '19 and this is my first time doing taxes with it.  Inputting everything in Turbotax Schedule E my net loss is $43,101, but Turbotax states since my wife and I make over $150,000, none of that loss can be deducted.

Rental Property income:

Your deductible losses = zero

What you will see on your 1040 at this point: zero

Should we file married but separately so one of us can claim this loss?  I always figured I'd benefit from owning a rental property in terms of taxes, but this is news to me.  What does my income have to do with how much I lost on an investment?4

[AmeliesUncle]

Assuming you live with your spouse, filing Separately still won't allow you to claim any losses.  Sorry.

Generally, the "passive losses" from a rental property can only offset "passive income", and can't offset other income.  In some cases there is a special rule that allows you to claim up to $25,000 of losses per year, but that does not apply if your income is over $150,000 or if you file as Married Filing Separately (while living with your spouse).

Because this is your first year, I highly recommend going to a tax professional to ensure you are doing things correctly.

[AmeliesUncle]

... one more thing ...

Although your losses are not deductible this year, they will carry forward to future years.  They will continue to carry forward until (a) you have passive income (such as a profit from the rentals) for the losses to be used against or (b) you sell the property in a "fully taxable transaction".

[nermin-seferagic]

So what is my best option to realize any of these losses?  Should I register the building as a standalone LLC?  Would that change anything in terms of taxes?

[AmeliesUncle]

The only way to use any of those losses is (1) have "passive" income (profit), (2) sell the property, or (3) have income less than $150,000.

No, an LLC would not change the fact it is still a "passive" loss.

[LgLutzfamily]

Is the $150,000 cap on income a new requirement?

[MayaD]

No, it is not. 

The amount of rental losses that you can write off is proportionately phased out between $100,000 and $150,000 if you are filing joint return.

[LgLutzfamily]

Thanks. Another question:

Does it matter if one is an "active" or "passive" participant if our income is over $150K?

[Carl]

Rental income is passive income. That means you don't go out and physically "do something" on a recurring bases to actually "earn" it. All you do is "sit there" and collect rental income. That's it. Likewise, rental expenses are passive also. Therefore, your passive rental expenses can only be deducted from the passive rental income. Once the expenses get the taxable income to zero, that's it. You're done. Any excess expenses are automatically carried over to the next year.

It is "EXTREMELY COMMON" for rental property to "ALWAYS" have a loss every single year - especially if there's a mortgage on the property. If you take the common deductions of mortgage interest, property insurance, property taxes, and the depreciation you are required to take by law, those four items alone will exceed the total rental income you receive for the year. Add to that the other rental expeness you're allowed (maintenance, cleaning, repairs, etc.) and you're practically "guaranteed" to operate at a loss *on paper* every single year.

So with each passing year your carry over losses will continue to accumulate, increase and grow. That's fine, it's expected and absolutely normal.  You can't realize all those losses until the year you actually sell the property. Only in the year you sell the property can you deduct your accumulated losses from other "ordinary" income. So until then, your passive carry over losses continue to grow and continue to be carried over each and every year.

For a married couple to file separate is the absolute worst way for a married couple to file. When you do that, both of you *AUTOMATICALLY* lose deductions you would otherwise qualify for if you filed joint. So filing separate returns just because you think it will help with rental losses will just end up with both of you paying more in taxes.

[Anonymous_]

---

@LgLutzfamily wrote:

Does it matter if one is an "active" or "passive" participant if our income is over $150K?

---

Not really since active participation affects the special allowance.

See https://www.irs.gov/publications/p527#en_US_2019_publink1000219122

[selfreporter]

Is it possible that turbotax always report net rental income as 0 even after the rental depreciation?

For my situation, say if the depreciation this year is 5000 (calculated with form 4652), and net rental income before depreciation is 2000. Turbotax only report 2000 in schedule E line 18, and 0 in line 21/22 instead of reporting 5000 in schedule E line 18 and -3000 in line 21/22 as rental loss?

[PatriciaV]

The depreciation deduction cannot create a loss for a rental property. If you had at least as much income as the depreciation expense, the entire amount would be used as a deduction, Otherwise, the excess is carried forward to a year when you have enough income to match the carryover. 

@selfreporter 

[Learner2]

I Have 3 rentals, all have some depreciation. One rental was profitable, and the system took prior loss from the profit with resulting profit of zero. The second has a rental loss of about 16k. The third has profit of about 9K. Turbotax wants me to pay tax on 9k and accumulate 16k as a loss. Why cannot it subtract 9 from 16, so I do not pay tax this year and accumulate 7k as a loss for proptery 2? Thanks.

[AmyC]

Please see page 19 of   Pub 527 that explains the types of losses and limitations to determine which ones apply to you.