Passive activity loss from rental properties in AZ

[noelkan]

I am a resident in CA and am filing nonresident in AZ for rental properties owned in AZ. On the AZ nonresident tax return in 2016 (being the first year filing in AZ), we had passive losses from these rental properties. So we did not pay any AZ taxes. Do these passive losses carryforward to 2017 tax return (similar to Federal/CA) except that it only bases on AZ sources?  Does the allowed and unallowed loss to each property in 2017 calculate similarly to the Federal/CA calculation?  There was not any passive loss carryforward schedule from my 2016 AZ nonresident return. Please advise.  Thanks.

[noelkan]

I would greatly appreciate it if someone can help with my question.  Thanks.

[noelkan]

Thanks, maglib.

[maglib]

you are welcome.  I own some rentals and am moving in a few years out of the state.  I've been trying to get advice.  Many accountants just say don't report it and wait to get audited (rule of 50% they call it, if 50% chance you can get away with it).  Others say, it must be reported.  With the fact that the tax authority knows who owns what and the fact that the tenants report to the state their rent, I would never not report amounts.  I'm fairly in the rule of 100%, do the right thing, always.

[noelkan]

I agree with you. Thanks.

[maglib · Accepted solution]

AZ pretty much follows the fed when it comes to rental properties other than the depreciation.  They have passive activity loss limitations to extent of income.  Stick with basic depreciation and they will be similar. Issues exist if you have other properties though in other states as federal allows losses from one property to offset gains from another property while non-resident states only allow that states property.  TT should handle this situation for you.

You will also file a return if your income from rental exceeds the filing requirements. There is some bad information about the net meeting requirements, that is not so.  It is gross income threshold.

[447debbie]

As maglib had stated, "Issues exist if you have other properties though in other states as federal allows losses from one property to offset gains from another property while non-resident states only allow that states property.  TT should handle this situation for you."

I have that issue.  How does Turbo Tax address this?  I live in Illinois, have a farm that is rented in Wisconsin, have a house that is rented in Arizona.  Wisconsin Farm has income and no losses.  Arizona Rental has income but losses exceed income.  Federal allowed me to deduct this Arizona Rental loss but now I have an issue.....how do I show these as suspended losses on the Arizona returns?  Some losses go back to 2014.

[Carl]

When dealing with rental real estate is is "extremely" uncommon to show a profit *ON* *PAPER* when you file your taxes each year. This is especially true if there is a mortgage on the property. In fact, it's much more common for rental property to show ever increasing losses with each passing year, that just get carried forward to the next year. Those losses continue to increase and accumulate with each passing year. They never expire.

You don't actually get to 'realize" those losses until the year you sell or otherwise dispose of the property.

Generally, the mortgage interest, property taxes and the depreication you are required to take by law, will all by themselves exceed the amount of rental income received. Add to that your other deductible rental expenses such as insurance, repairs and maintained costs, and you're practically guaranteed your allowed rental deductions will exceed the rental income. Since rental income and expenses are all passive and passive expenses can only be deducted from passive income, that's why you have ever increasing losses that just get carried forward year to year.

But in the year you sell the property, all those carry forward losses are first deducted from any taxable gain realized on the sale. Then if you still have more losses to deduct they are deducted from your other "ordinary income".

Now depending on your AGI for the year, your deduction from ordinary income could be limited to $3000 for that tax year. But that's fine because you'll still be able to carry forward the unallowed losses and deduct each year until they're all used up.

[bazbsg]

What if I do have a year with a profit on Arizona rental properties? (I don't have properties in any other state so that issue is avoided. Also, I am a non-resident of Arizona; I live overseas.) You are right that the past several years since I bought them, they always showed a loss due to depreciation. But in 2020 I didn't have any travel expenses due to COVID19 and the rents were higher than in past years so I do show a small profit. Can I carry forward last year's loss or the first year's loss to offset the profit this year? If so, how do I tell Turbotax because it should know but didn't do that?

[DianeW777]

Any passive activity loss (PAL) carryforwards allowed would be listed on your Form 8582, Worksheet 5 or 6, in your 2019 tax return as 'unallowed loss'.  If you have a PAL and it does not seem to be populated in your 2020 tax return you can take the following steps to enter it.

The alternative minimum carryovers may be the same if your assets are using the 27.5 year depreciation method (most common).  Look for a similar Form 8562 with "Alt Min Tax" under the main title

• Use the Search (upper right) > Type rentals > Select Edit beside your Rental Activity  > Under Less Common Business Situations > Edit Carryovers, limitations, at risk info, etc. > Continue to enter your passive loss carryover

Arizona (AZ) filing requirements can be found here. If you have a negative result, then you may not need to file AZ. If you have a positive income then the AZ return must be filed if that is where the property is located.

[bazbsg]

In past years, 2019 and 2018 at least, all my real estate losses were allowed in my federal taxes. The was good because it offset other income. But in the Arizona state taxes, the losses were of no benefit because there was no other Arizona income to offset against. I didn't pay any tax to Arizona of course because I had a negative income.

So is there a way to carry forward a past year loss to offset this year's income in that same category of rental income on the AZ taxes?

I have read some place that when I sell the house I can apply those losses to reduce the capital gain that will be taxed. Did I understand that correctly? But either way, can I use part of the loss to offset the profit this year?

[MarilynG1]

@bazbsg Yes, you can apply any rental carryover losses against any Capital Gain when you sell your rental property.  TurboTax will do this for you automatically when you report the sale of the property. 

Click this link for more info on Sale of Rental Property

In your Arizona interview, you are asked what portion of Federal amounts applies to Arizona income (screenshot).

You will be able to include any Arizona-related Rental Loss or Capital Gain/Loss on your Arizona Return.

Click this link for more info on Arizona Rental Income. 

[bazbsg]

Thank you for confirming about the sale of a property. That will be good to know sometime in the future when I sell.

I did do what you said about the Arizona portion of the amounts from the federal. For the rental item, the last several years I had a loss but this year I have a small profit. For all other items, the Arizona amount is zero since I don't live there anymore.

So my question is, can I use the loss from last year to offset the profit from this year?

I guess this is more of a tax law question than a Turbotax question. I did try to search online for an answer but couldn't find one.

[MarilynG1]

@bazbsg If you had a carryover loss for Schedule E last year, it could be used against Rental Income this year.  

Check your Schedule E to see if any of your carryover loss was used this year.  If so, that  reduces the amount of rental income you have to report to Arizona (by reducing your rental income in your Federal return).

So in essence you are applying your Carryover Loss to your Arizona Rental Income, you are just doing it in your Federal return. 

Click this link for more info on How to Enter Passive Loss Carryovers. 

[bazbsg]

For federal purposes, my rental property losses were fully allowed as they were below the maximum allowed (and fully utilized as I had other income to offset against). So there was no federal carryover. For Arizona purposes, my rental losses had no other income to offset. I had a negative total income in Arizona last year and paid zero tax. But this year I have a rental property gain that is smaller than last year's loss. Yet it still shows me owing tax to Arizona. So it's like for Arizona purposes, my loss is going to waste???