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shengj2002
Level 2

Rental House Depreciation and Rental Loss Deduction

I have rental house income $10K.  Rental property depreciation is $20k. So my rental loss is $10K. However, if I enter all info in schedule E, I can’t deduct the loss because my MAGI is over $150K. I have a sole proprietor LLC and actively participated in the business. Since there is no income limitation to deduct losses in schedule C, I tried entering everything there. However, I don't seem to find anywhere that I can enter depreciate for residential rental property. Only commercial is allowed. I wanted to enter residential property depreciation in schedule E and everything else (income, expense etc) in schedule C. Can I do that? It seems Turbo tax allowed it and passed all checks.

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Accepted Solutions
Anonymous
Not applicable

Rental House Depreciation and Rental Loss Deduction

if you are a real estate pro all your rental activity goes on schedule E not C unless you provide the renters with significant services

the irs says

Landlords report rental income on Schedule C -- "Profit or Loss From Business" -- if they provide more than basic services to tenants. Housekeeping, linen service, maid service and meals are examples of substantial services that would require a landlord to use Schedule C. In essence, once you start providing substantial services, you're not just renting property; you're running a hotel or boarding house. Those count as businesses -- thus the requirement for Schedule C. 

 

 

putting rental activity on Schedule C to get a deduction when you don't qualify, could be viewed, if caught, as tax evasion.  if you put them on schedule C, since it is a business there is no such thing as residential real estate. it's commercial.   so this will result in a 39-year life for the property.   should you sell this property and its not a schedule C business, your depreciation recapture would be based on a 27.5-year life.  

 

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6 Replies
MinhT1
Expert Alumni

Rental House Depreciation and Rental Loss Deduction

Your rental activity is a passive activity even if you actively participated. The rental activity is reported on Schedule E and passive losses are suspended if your MAGI exceeds $150k.

 

The rental activity can only be a non-passive activity if you are a real estate professional.

 

You qualify as a real estate professional for the tax year if you meet both of the following requirements.

  • More than half of the personal services you perform in all trades or businesses during the tax year are performed in real property trades or businesses in which you materially participate.

  • You perform more than 750 hours of services during the tax year in real property trades or businesses in which you materially participate.

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shengj2002
Level 2

Rental House Depreciation and Rental Loss Deduction

Thanks a lot for the reply. I probably fail the 750-hours test.

Just for my education, if I was a qualified real estate professional, is that the proper way to enter rental house depreciation and deduct losses: Enter depreciation in schedule E and everything else in schedule C since I don't think I can enter residential property depreciation in schedule C ? 

MinhT1
Expert Alumni

Rental House Depreciation and Rental Loss Deduction

If you qualify as a real estate professional, you will enter your rental business on schedule C. TurboTax accepts residential property depreciation if you enter the asset as such on Schedule C.

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Anonymous
Not applicable

Rental House Depreciation and Rental Loss Deduction

if you are a real estate pro all your rental activity goes on schedule E not C unless you provide the renters with significant services

the irs says

Landlords report rental income on Schedule C -- "Profit or Loss From Business" -- if they provide more than basic services to tenants. Housekeeping, linen service, maid service and meals are examples of substantial services that would require a landlord to use Schedule C. In essence, once you start providing substantial services, you're not just renting property; you're running a hotel or boarding house. Those count as businesses -- thus the requirement for Schedule C. 

 

 

putting rental activity on Schedule C to get a deduction when you don't qualify, could be viewed, if caught, as tax evasion.  if you put them on schedule C, since it is a business there is no such thing as residential real estate. it's commercial.   so this will result in a 39-year life for the property.   should you sell this property and its not a schedule C business, your depreciation recapture would be based on a 27.5-year life.  

 

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shengj2002
Level 2

Rental House Depreciation and Rental Loss Deduction

Ah I got it now.  These rental houses are treated as 'hotels' in schedule C. If I did provide significant services I can depreciate them as  commercial property.  That's is why i can't find residential property depreciation there. Now that the puzzle is finally solved I think I will enter rental activities in schedule E. Thank you!

Carl
Level 15

Rental House Depreciation and Rental Loss Deduction

The first thing I want to stress here is these six words enclosed in asterisks

*Long* *Term* *residential* *rental* *real* *estate*.

Long term residential real estate income/expenses is reported on SCH E *no* *matter* *what*. There are really no exceptions that would not result in you being audited, and probably also investigated for tax fraud "with intent" to defraud the IRS. It may not happen right away. But rest assured it will happen.

The fact you can't take the deductions because of your MAGI does not mean you lose them. You don't lose them. They just carry over. Even if your MAGI is to high for years to come, including the year you sell the property, they continue to carry over. But in the tax year you sell the property all of those carry over losses "can" be used in the tax year you sell. Nice thing about that in the year  you sell, is that once your carry over losses get your SCH E income to zero, the remaining losses *up to $3000 per year* can then be taken against other ordinary income.

So I suggest you quit trying to beat the system. Otherwise it will beat back and beat your wallet to an absolute pulp.

A few other things:

SCH E property is depreciated over 27.5 years.

SCH C property is depreciated over 39 years.

The TurboTax program flat out can not correctly deal with switching SCH E property to SCH C, or vice versa. Doing so throws the depreciation "way" off and it's impossible to "fix" with the TurboTax program.  If you switch long term rental property to SCH C it will be impossible to get the depreciation figures right, and good luck proving to the IRS that you provided your tenants services on a recurring basis that was directly beneficial to the tenants.

 

Be aware also that SCH C income is subject to the additional 15.3% self-employment tax. So with such a switch that's just "yet another" flag raiser for the IRS to question why you were not reporting this on SCH C all along. Add to that, a SCH C business is expected to show a profit after 3 years in general. If no profit shown after 5 years it raises yet another flag. Since rental property almost "always" operates at a loss on paper at tax filing time every year, that's just another cog in the soup to raise flags.

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