NOL Net Operating Loss for Rental Properties

[burgerguy14]

NOL Net Operating Loss for Rental Properties

I own 2 rental properties which generated losses in years 1,2 and 4 of existence. 

Year 1 was 2017 which I filed an incorrect tax return on.  I am getting reading to submit a corrected return for 2017. 

I have not filed taxes from 2018 thru 2022 because I knew I would not have any taxable income.  I am preparing 2018 – 2022 returns now.

I believe I am entitled to NOLs after reading IRS publication 536 on Net Operating Losses for Individuals.

Can I carry any of the NOL’s back to 2016 (I was a w-2 employee back then)?  Or should I just carry the NOLs forward at this point?

[tagteam]

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@burgerguy14 wrote:

I believe I am entitled to NOLs after reading IRS publication 536 on Net Operating Losses for Individuals.

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Publication 536 does mention real estate losses but without any specificity.

Based upon a post you made in another thread, you do not provide "substantial services to your tenants", which would essentially permit filing on Schedule C which, in turn, could create an NOL.

Further, it does not appear as if you are a real estate dealer (e.g., your business is buying and selling real estate), which would, also, permit filing on Schedule C which, in turn, could create an NOL.

Beyond the aforementioned, you would have to qualify as a real estate professional who materially participates in your rental activities in order for the losses to be considered nonpassive. 

See https://www.irs.gov/publications/p527#en_US_2022_publink1000234059

Note that whenever you read something on the order of "rental qualifies as a trade or business" around here, they could very well be referring to being treated as a trade or business for the purposes of the QBI deduction. 

I am going to page @AmeliesUncle and @Mike9241 for further input.

[Mike9241]

@burgerguy14 seek professional help. in case where the losses would be passive, if your AGI was low enough, an amount up to $25,000, would be available to offset other income.   your problem is by not filing timely returns or amended returns for certain years those losses may be permanently lost.  

[tagteam]

I agree with @Mike9241; it's more likely you would have a loss eligible for the SDA (up to $25,000) which you could use to offset other income.

However, since you mentioned little (or no) income, you might not be able to take advantage of the SDA. As a result, the loss would be carried forward as a passive loss. 

Eventually, you may have passive income which could be offset by the accumulated passive losses or you could use the suspended passive losses to offset gain when you sell the property (the sale could actually result in an NOL).

[burgerguy14]

I read thru the instructions on 2017 & 2018 Net Operating losses (IRS Pub 536).  It looks like I've missed the deadlines for both years.  Based on what I've read I can only carry these losses forward.  Which is unfortunate b/c I was in a much higher tax bracket for the years I would have been able to carry back.

I've contacted a CPA and I'm waiting to hear back.  Maybe there are some work arounds or leniencies granted.  Doubtful. 

NOL Year	Carryback year	1040-x deadline to carry back
2017	2015 – p536 says only back 2 years	4/15/2021
2018	2013 – CARES Act allows 5 year carry back	4/15/2022

[tagteam]

Wait until you hear from your CPA. I don't believe we're going to be able to convince you that you don't have an NOL.

[burgerguy14]

@tagteam

I'm fine taking it as a passive loss.  But when I work through TurboTax, I don't see a passive loss carrying over to the next year.   But at the end of each TT "Walk thru", TurboTax says "it looks like you have a NOL".  And to manually calculate the NOL and enter in the appropriate form.

Maybe I'm missing a step when I go through TurboTax???

Thanks.

[tagteam]

@burgerguy14 

You are correct, and you are not missing anything. It's simply that TurboTax tends to throw that message if your AGI is negative. That is actually the program making an attempt to alert you to the fact that you should check and see if you have an NOL (using the NOL worksheet).

[burgerguy14]

I used the NOL worksheet, and it shows I have NOL 2017 & 2018.  No NOL for 2019-2021.  And a small NOL for 2022.

[tagteam]

I understand, but you can't use your net rental losses as part of that equation unless you provide substantial services to your renters or you are a real estate dealer. 

[Mike9241]

while passive losses automatically carry forward the rules for NOL are different. For the years involved when the loss incurred you had to make an affirmative election on a timely filed return to carryforward the NOL. failing this the NOL could only be carried back. 

[burgerguy14]

@Mike9241  Agreed - I am in quite a pickle.  I did not choose to waive my carryback in a timely manner for 2017 & 2018. B/c I did not file the waiver, I cannot waive the carryback period. And I am not eligible for the carryback period. Kind of a Catch-22.

I'm fine using passive losses and carrying them over but it doesn't seem to work for me.

Here's a Form 1040 illustration:

Interest and dividends : 11,000

Capital Gains/loss: -3000

Rental real estate: -21,500

AGI: -13500

Itemized deduction: 37,000

My Itemized deductions wipe out all of my income. 11k - 37k = -26k

The real estate losses were not needed to decrease my tax bill.  There is no carryover of my real estate losses. to the next year.  Maybe I'm missing something here.   Like I forgot to click on a checkbox.

(The capital gains/loss doesn't actually get used and gets carried over to the next year).

[tagteam]

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@burgerguy14 wrote:

(The capital gains/loss doesn't actually get used and gets carried over to the next year).

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Your real estate losses should also not actually get used but carried over to the next tax year (as passive losses) unless certain criteria are met. 

[burgerguy14]

@tagteam Ok that's a relief.  I must be doing something wrong when going through the interview questions.  Or maybe I need to manually carry them over.??

[tagteam]

For example, indicating you materially participated as a real estate professional or something similar during the interview process.

I'm not sure because I can't see your return but under normal circumstances, you would simply have passive loss carryovers.