Deducting Rental Property Expenses

[Veli1]

In 2021, I converted then my primary home to a rental (for the last 45 days of the year). I have $300 in rental income, but have made repairs and my expenses total $14K, but I'm still not able to deduct the losses. Why is that? 

[AnnetteB6]

If your rental loss deduction is zero, the rental is a passive activity and the losses are passive losses carried forward until they can be used to offset passive income.

There is an exception that allows you to deduct up to $25,000 passive loss for rental real estate, but this exception does phase out as your modified Adjusted Gross Income (AGI) increases.  It starts to phase out at $100,000 modified AGI and completely ends with modified AGI above $150,000.  There are different limits and rules if Married Filing Separate.

To learn more, see the following TurboTax article:  Real Estate Tax and Rental Property

The discussion about passive activity losses is at the end of the article.

[AmeliesUncle]

You had $14,000 of expenses in 45 days?  Or is that for the entire year?  Be sure you are not entering things as a "repair" when it actually should be a depreciable "improvement".

Is the property being converted to a rental for at least a year?  Or is it going back-and-forth between personal and rental use?

[Veli1]

The $14K in expenses refers to several upgrades (ex. bathroom) and replacement of the A/C and furnace. 

The property in question will be rented all year long. It was converted from a prior personal residence to a rental in mid-November 2021. 

[Veli1]

Thank you for the thorough response. Is the only way to claim a deduction on this year's tax return then through depreciation of the asset(s)? Would that lower our AGI or since it's passive it's only applicable to the income generated from the rental? 

[AmeliesUncle]

Yes, the upgrades and furnace/AC are depreciable improvements, not repairs, which are generally depreciated over 27.5 years.

]If your income is over $150,000, passive losses are not allowed, so the losses will be carried forward until (a) there is passive income or (2) the property is sold.

Just be sure you are entering ZERO personal days.  You only enter the number of personal days AFTER it was converted to a rental.