How are Rental Expenses Calculated?

You should also have set up the rental property as an asset, broken down by building and land, so that depreciation is calculated.

 

If your rental expenses exceed your rental income, TurboTax will limit your deductions. Rental losses are generally treated as passive losses, which can only be deducted up to the passive income reported except as explained below

 

There are two kinds of passive activities:

• Trade or business activities in which you don’t materially participate during the year.
• Rental activities, even if you do materially participate in them unless you’re a real estate professional.

If you or your spouse actively participated in a passive rental real estate activity, the amount of the passive activity loss that’s disallowed is decreased and you therefore can deduct up to $25,000 of loss from the activity from your nonpassive income. This special allowance is an exception to the general rule disallowing the passive activity loss. Similarly, you can offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception.

 

You can only deduct suspended passive-activity losses in 2 situations:

    Against passive-activity income

    When you dispose of the passive activity in a fully taxable transaction to an unrelated party

 

See IRS Publication 527 for more information.

 

See here for more information from TurboTax on rental property.