Rental Property Deductions - Married Filing Separa...
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EdAppleberry
Returning Member

Rental Property Deductions - Married Filing Separately; Oppsie Daisy!!

I am a landlord of 3 properties.  I have always been able to use the special loss rules, to adjust my non-passive income.   It's always been a nice little deduction to help offset.  last year I was married. My impatient wife filed taxes for last year, very early.  She likes to get her money, and she insisted on filing Married/Separately, before I had time to sit down and figure things out.  I am about to file my taxes, and you can guess where this is going...I cannot claim any special loss on my rental property, because I just discovered the rule that you cannot use passive-loss to offset non-passive income if, and only if, you file Married filing Separately, and you lived together at all through the year.  First, can someone explain the purpose of this rule to me.  I'm racking my brain why this one rule, that ruins everything for me now, is there.    Why filing Married and Jointly or Married and separately, has anything to do with real estate that I've claimed losses on for 20 years?  Just curious as to the intent of this?  2nd, what are my options?  Can I carry over the loss to next year, when we will hopefully file jointly, and then I can use that loss to offset?  Can my wife go back and amend her taxes this year, and change it to married filing jointly, if we find that productive.  I did sell a rental property this year, and because of depreciation, may owe money on that, even though I sold it a a big loss.  Can that be offset by passive-loss, or is that capital gains, and so no.  Sorry if I may be using the wrong terms here exactly, my brain is burnt out from researching why non of my rental losses were being applied to my tax return, and I just kept getting a big fat zero.  Thank you for any advice. 

6 Replies
AmeliesUncle
Level 11

Rental Property Deductions - Married Filing Separately; Oppsie Daisy!!

For the intent, if everything was allowed when a person filed Separately, there would be many situations that a family could save taxes by filing Separately.  That was not the intent of Congress to have the option to file Separately, so they restrict a bunch of credits and deductions.

 

Yes, your the Passive Loss will carry to next year, when it can hopefully be used.  Another option is to amend her return now and file Jointly.  If your wife is agreeable to it, that has the potential to save additional taxes.

 

If your sold property has a "gain", yes, the losses from your other rental can be used to offset that.  However, if you truly have a tax "loss" (which factors in the lowered Basis due to depreciation), no, there is no tax on the depreciation.

 

For example, let's say you bought the home for $100,000 and were able to claim $20,000 of depreciation.  The "basis" for gain/loss is now $80,000. 

  •  If you sell it for less than $80,000, there is NO tax, and can claim a deductible loss. 
  • If you were to sell it for $90,000, you would pay tax on $10,000 of the depreciation. 
  • If you were to sell it for $110,000, you would pay tax on the on the $20,000 of depreciation plus $10,000 of long-term capital gain.
SusanY1
Employee Tax Expert

Rental Property Deductions - Married Filing Separately; Oppsie Daisy!!

As for the "why", I couldn't begin to speculate but the Married Filing Separately (MFS) status is punitive in many ways and does not allow a number of credits or deductions that are allowed with other filing statuses. 

 

You can carry the losses forward, and you do have the option to amend your wife's tax return to add your income and file jointly.  While it's difficult (or impossible after certain deadlines) to amend a joint return to separate, you can easily amend the other way around and you may find it beneficial. 

 

My advice - file an extension now (and make a payment if you expect you may owe taxes, to reduce or eliminate any potential penalties or interest.)  (File an extension here: TurboTax Easy Extension

 

Then take a look at what a jointly filed return will look like (if your wife agrees, she must be amenable to filing jointly if you make this change.) 

 

You can always abandon an amendment if the result doesn't turn out better for the both of you.  

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EdAppleberry
Returning Member

Rental Property Deductions - Married Filing Separately; Oppsie Daisy!!

Thank you so much for the response.  On follow-up question about avoiding penalties.  Since today is the filing deadline, is it also still the taxes payment deadline?  If I extend today, will I automatically receive a penalty?  Is that why you recommended making a partial payment?  So that I may avoid that penalty?  I'm also wondering, if I do not file today, how would I make a payment on an amount that I do not owe yet.   Thank you again.

 

 

AmeliesUncle
Level 11

Rental Property Deductions - Married Filing Separately; Oppsie Daisy!!

Yes, today is the due date for payments, and an extension does not change that.

 

Penalties for your personal tax return are based on the amount that you owe.  If you do not owe anything (such as getting a refund), there is no penalty.  So yes, it is a good idea to make your payment in full (or more than you think you will owe) today if possible.

 

IRS Direct Pay is the easiest way to do so.

https://www.irs.gov/payments

 

janijayram
Returning Member

Rental Property Deductions - Married Filing Separately; Oppsie Daisy!!

I have little different situation. My rental property is under Trust my partner and I. Last few year I am filing all income and expenses under his filing. Can I switch to my filing from next year? We are not married but live under the same roof. 

AmeliesUncle
Level 11

Rental Property Deductions - Married Filing Separately; Oppsie Daisy!!


@janijayram wrote:

I have little different situation. My rental property is under Trust my partner and I. Last few year I am filing all income and expenses under his filing. Can I switch to my filing from next year? We are not married but live under the same roof. 


 

You are not allowed to pick-and-choose who claims the income.  It must be reported based on your ownership percentage of the rental activity.

 

And if it is under a Trust, you need to know what kind of Trust it is, and you may need legal assistance with that.

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