Last year my rental property had a negative net income. This year my expenses appear to be capped at the amount of my rents received. Why?

[shpurdum]

On my 2015 return, my rental property income was about $12,000 and my expenses about $22,000. Thus Turbotax reported my net income at about -10,000.

On my 2016 return, my rental property income was about $11,000 and my expenses about $23,000. Thus Turbotax reported my net income at zero.

Why doesn't it report my net loss in 2016?

[MichaelDC · Accepted solution]

This is a very, very common situation. While not knowing your situation, it's usually a problem of "making too much money". If the explanation below doesn't apply, post some more details in the comment section.

As a general rule, rental properties are, by definition, passive activities and are subject to the passive activity loss rules. These rules are quite complex. In general, the passive activity rules limit your ability to offset other types of income with net passive losses.

But the good news is there is an exception: If you actively participate in a rental real estate activity, you can deduct up to $25,000 of your rental loss even though it’s passive. To actively participate means that you own at least 10% of the property, and you make major management decisions, such as approving new tenants, setting rental terms, approving improvements and so forth.

But this exception phases out as your income rises . If you have modified Adjusted Gross Income over $100,000, the $25,000 rental real estate exception decreases by $0.50 for every dollar over $100,000. The exception is completely phased out when your modified adjusted gross income reaches $150,000.

Example:

Phil and Mary have modified Adjusted Gross Income of $90,000 and a rental loss for the year of $21,000. They actively participated in the rental. Since their modified Adjusted Gross Income is below the  $100,000 phase-out threshold, their entire rental loss is deductible even though it is a passive loss. If their loss had risen to $28,000, they would have been limited to a deductible loss of $25,000 for the  year—the nondeductible balance of $3,000 is  a passive loss that is carried over to future years until the passive loss tax rules allow it to be deducted.

If your income is above $150,000, any disallowed rental loss is carried forward to the next year along with all previous years' disallowed losses. Those can be applied to any subsequent passive income from that rental and are completely released for deduction upon sale of the property.

[babupol1]

Hello, need a clarification on the above rule. In the example above, is it the combined income of Phil and Mary that is used to calculate the phase out of $25000 allowance? In other words, is the limit of $150,000 when Phil and Mary do a "Married filing jointly" return? What happens if they do a joint return, but only one of them "own" the rental property? Another follow up question about carrying over disallowed rental loss to next year. Does Turbo Tax keep track of our losses from year to year and automatically applies it while filing tax returns for next year, or are we responsible for entering it manually when we are filing tax returns for next year? Thank you.

[MichaelDC]

Yes. It's the same $150k limit whether Married Filing Jointly or single, whether it's jointly or singly owned, and regardless of the number of properties. Yes. TurboTax keeps track of the Passive Activity Loss Carryover which is reported on Form 8582 from year to year.

[bidc34]

This makes no sense.  so you are saying that two people living together making $99K each can deduct $25K each for rental property but, if they married they could not deduct anything?  that is a marriage penalty.  who came up with that?  what about filing separately?  then they could deduct the $25K each?

[MichaelDC]

The rental loss limitation for Married Filing Separately is $12,500.

[bidc34]

I am not a long time user of TurboTax.  How long have these rules been in effect? the rule of $25K max. loss and the $100-$150K income constraint.  Thanks

[dave541]

Was there a change from 2016 to 2017? My rental-property expenses exceeded rental income (by say $10,000) both years. My income in 2017 is less than in 2016 (under $100k). But in 2017 TurboTax shows rental property income = $0, whereas in 2016 TurboTax showed negative -$10,000. [It doesn't make a difference whether or not I check the boxes for "Real Estate Professional", >750 hours, actively involved, >50% work time.] Is there some other category that I might have accidentally changed? Or some other circumstance that would have caused this? Thanks for any help in clarifying this!

[TaxGuyBill]

@dave541  Did you indicate that you used the property for any personal days?

If so, was it 100% converted to 100% rental (or vice versa)?  Or was it back and forth between personal and rental use?

[SweetieJean]

Note that OP is asking from TT Business.

[TaxGuyBill]

@SweetieJean   OP was a year ago, but there is an add-on user asking a similar question.

[dave541]

Tks, @TaxGuyBill ! That may be it: in 2017 I got no rent for 6 months, 3 of which I used to work on the house (which I think I listed as personal use).  
[Aha, I hadn't see that OP was TT Business, sorry about that. Mine is personal, TT Premier.]

[TaxGuyBill]

@dave541   Was it truly personal use, or was it just working on the rental property?  Was it a rental for BOTH before and after the work period?

[rlb_ny]

OK My AGI is >150K and I have a rental that when I claim expenses for Turbo tax allows me to take.

In fact the expenses are more than the rental income so it is a negative number that actually shows up on my schedule E and ultimate is in the 1040.   

I thought that wouldnt be allowed as im not a real estate professional either.

Is this a bug in turbo tax.

I was audited in 2018 by NYS as they did allow this and now 2021 turbo tax allows it.

I tried several combinations but it basically the expense and other expenses when you enter them and greater than the rental income. 

[GeorgeM777]

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.