Is it OK to report a rental loss?

[Steve Lea]

I have a two bedroom apartment, rented a room out to a friend in 2022 for 8 months.

Base on the tax guideline, I assumed a 30% area usage, the cost would be:

(mortgage interest  + utilities + apartment management fee) x 30%  x 8/12 

The cost was slightly greater than the rent. 

Is it OK for me to report a rental loss? or simply don't report it?

[JamesG1]

You are required to report the income.

Many rental real estate tax returns claim a loss and the $25,000 exception for rental real estate with active participation allows many taxpayers to claim the real estate loss against ordinary income.  See IRS publication 527, page 13.

Exception for Rental Real Estate With Active Participation 

If you or your spouse actively participated in a passive rental real estate activity, you may be able to deduct up to $25,000 of loss from the activity from your nonpassive income.

This feature may not currently be available to you depending upon your modified adjusted gross income (see page 14).

Generally, if your MAGI is $150,000 or more ($75,000 or more if you are married filing separately), there is no special allowance.

Are you reporting depreciation?  I do not see it listed.

If you rent your property below fair market value, the IRS may consider that you do not rent your property to make a profit. In this case, you can deduct your rental expenses only up to the amount of your rental income.  See here.

@Steve Lea 

[Carl · Accepted solution]

It is not common for residential rental real estate to show a profit. When you add up the deductible expenses of mortgage interest, property insurance, property taxes, and the depreciation you're required to take by law, those four items alone will usually exceed the total rent collected for the year. Add to that the other allowed rental expenses (maint, repairs, utilities, etc.) and you're practically guaranteed to show a loss every single year.

If you meet the criteria (and you probably do) then up to a maximum of $25K of those passive losses can be taken against other "ordinary" income. Otherwise, unallowed losses are just carried over to the next year. Typically, you can't realize your carry over losses until the tax year you sell the property.

One issue with renting out part of your residence, is that the depreciation taken in that first year will usually be wrong. You can confirm it by using the MACRS worksheet on page 37 of IRS Publication 946 at https://www.irs.gov/pub/irs-pdf/p946.pdf  The table that applies for line 6 of the worksheet is table A-6 on page 72. Fixing the error so you can still e-file is easy. Let me know if you have this issue, and I'll show you how to fix it so you can still e-file.