Section 179 Against Previous Years W2

[theoracle101]

The CARES act allowed NOLs from 2017 - 2020 to be carried back 5 years prior. 

My wife and I file a joint return, and from 2015-2019 we both earned W2 income. Starting in 2020, I left my job and became a full time real estate professional.

AFAIK, passive losses can be counted against W2 income as I am now a real estate professional. Can I carry losses from 2020 back 5 years against our W2 income? Is there a limit to how much bonus depreciation I can carry back? Is the above subject to AMT? 

[jobu1669]

Five year carry back is for losses earned in 2018-2020, not 2017.

Sec 179 has taxable income limits but not bonus depreciation.

In order to transform passive losses from real estate into non passive losses that can be counted against W2 income material participation in the real estate activity is required.

[theoracle101]

Thanks. I'm aware of material participation. I plan to be doing RE full time in 2020. 

My question is if I can deduct these loses from 2020 against 2018 to 2019, if I was a W2 earners during those years and not doing RE full time (but am full time RE for 2020 and 2021)

[jobu1669]

Yeah but only if you have a net operating loss to carry back....you can't carry back passive losses.

[theoracle101]

If I am a RE professional, wouldn't my passive losses become NOL?

[jobu1669]

As an RE Pro materially participating your passive losses become non passive and could create an NOL.....but you have to compute an NOL.

[AmeliesUncle · Accepted solution]

If you qualify as a Real Estate Professional AND you Materially Participate in the rental activity, yes, any losses can offset other income.

However, that does NOT make your prior Passive Loss Carryover usable.  That can only be used against passive income (or income from your formerly passive rentals).  TurboTax is NOT set up for that, so you will either need to figure out a work-around or go to a tax professional.

Your current-year losses would offset any other current year income (such as your wife's income).  If the losses are larger than your current year income, yes, you may have a NOL that can be carried back to 2015.

No, there is no limit for the NOL (including based on bonus depreciation).

Yes, the NOL may affect AMT.  However, TurboTax does not calculate NOLs at all, and I think AMT NOLs are even more problematic.  If you have an NOL, you may want to go to a tax professional, especially if you subject to AMT.

[theoracle101]

"Your current-year losses would offset any other current year income (such as your wife's income).  If the losses are larger than your current year income, yes, you may have a NOL that can be carried back to 2015."

Using made up numbers, lets say I had the following:

$100k in W2 income from 2016-2019

$100k in income in 2020. I became an active RE investors in 2020. I have bonus depreciation of $700k, which causes an NOL of $500k in 2020. 

Can I apply this $500k loss from 2020 against my :

1. $100k in income from 2020 AND

2. $100k in annual income from 2016-2020 if I was NOT an active RE professional during these years?

[AmeliesUncle]

Yes.

But again, for NOLs (especially if your income is anywhere near that high), I REALLY recommend a tax professional.

Also be aware the Bonus depreciation would NOT apply for the actual real estate.  It would only apply to appliances, carpet, land improvements, etc.  The real estate (building) does not qualify and it would need to be depreciated for at least 27.5 years (more in some cases).

On another note, I just noticed your title said "Section 179".  Using Section 179 would NOT create an NOL because it is limited to the amount of business income (which includes your current year W-2 income), but using Bonus depreciation would create the NOL.

[jobu1669]

Yep....tax pro is a must here. When someone is conflating bonus depreciation with a Sec. 179 deduction it's time for a tax pro to intervene.