Rental Property purchased the end of 2021, no income but pay tax and maintenance, can I deduct these from income?

[superlyc]

Hi, I have a question about rental property. I got this property Dec 2021. Paid tax, interest and did some maintenance. I entered all the information, but it did not change my refund value in TurboTax. One of the agent told me that is because I did not make income and the rental expense can only be deduct from rental income but not total income of 2021. I wonder if this is true? And can I recapture this loss for tax return 2022 when I have income?

Additionally, I am a residence of WA but the rental property is in NC. Since no income was made from Rental and I am not a NC residence, do I need to file NC tax for 2021?

Thank you in advance

[AnnetteB6]

There are a couple of things to consider with regard to the rental property.

First, if the property advertised and available to rent in December 2021, then it was placed in service in 2021.  You do report your rental expenses such as the interest, taxes, and maintenance on Schedule E.  You will also begin to depreciate the property itself based on the date it was placed in service.  All of these items coupled with no income for 2021 will generate an overall loss for the property.  

But, if your rental loss deduction is zero, then the rental is a passive activity and the losses are passive losses which are 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.

The other thing to consider is if your property was not placed in service in 2021 as a rental, then you will not report your expenses on Schedule E.  Any taxes that you paid may be deducted on Schedule A, itemized deductions.  The same is true for mortgage interest if the rental property qualifies as your second home.  Also, if the maintenance cost you incurred is considered to be a major improvement, then that cost will be added to the basis of the property when you begin to depreciate it on your 2022 return.  Otherwise, the maintenance cost is a personal expense and would not be deductible since the property was not yet placed in service as a rental.

No North Carolina return would be required for 2021 since there was no income to report.

[superlyc]

@AnnetteB6 Thank you. I do placed it in market as soon as I got it, that is Dec 2021. But not it was not rented out until Feb 2022. So no income.

So, just want to make sure if I understand correctly, the loss in 2021 (maintenance, tax and etc.) will be used to offset rental income in 2022, right?

No income made in NC in 2021, then no tax return need to file, even I have a property listed for rental, right? I know I don't have to pay tax to NC but not sure if I need file a tax return with NC.

[ColeenD3]

No, you can't carry expenses from one year to the next. Your expenses are eligible to be included from the December 2021 date you placed the property in service. the rental loss will be on your 2021 return.

As far as NC goes, you have no income, so you are not required to file a return. 

[superlyc]

@ColeenD3  Thank you. About "the rental loss will be on your 2021 return", I am trying to understand if the loss can be deducted from total income? I did listed as rental in 2021 but not rented out until Feb 2022. So I have no income.  I want to know whether the rental loss can only be deducted from rental income?

For example, I total income have two parts A + B. B is rental income. But I have rental loss C.  Does my total income equal to A+B - C?  Or is it  A, if B - C is negative? If the loss can not be deducted from total income, what is the point of reporting the rental loss in my case of making 0 rental income in 2021?

[ColeenD3]

Yes, since it was placed in service and available to rent in 2021, you would deduct the expenses even though you had no income. This will produce a small loss that can be used against other income.

[Critter-3]

OK ...

1) you do report the rental in 2021 since it was available for rent (even if you didn't get it rented until 2022) and you MUST also start depreciating the property.

2) if you have a loss it may be deducible against other income on the return or the loss will be carried forward... review the form 8582 for your particular situation. 

3) although you are not required to file the NC return one should be filed to preserve the loss on the record for future use ... if you don't file they could deny the loss carryforward. 

[superlyc]

@Critter-3 I think it might be cause my income pass the limit for claim the passive loss deduction. So my understanding is the nondeductible loss in 2021 can be carried over to future years until the passive loss tax rules allow it to be deducted. Is this right?

"although you are not required to file the NC return one should be filed to preserve the loss on the record for future use ... if you don't file they could deny the loss carryforward. " 

Yes, this is one of the reasons I want to ask if I need to file a NC tax return, even though I have not made rental income yet.

[ColeenD3 · Accepted solution]

You only need to worry about a passive loss carryover if your AGI is over the limit.

Phaseout rule.

The maximum special allowance of $25,000 ($12,500 for married individuals filing separate returns and living apart at all times during the year) is reduced by 50% of the amount of your modified adjusted gross income that’s more than $100,000 ($50,000 if you’re married filing separately).

If your modified adjusted gross income is $150,000 or more ($75,000 or more if you’re married filing separately), you generally can’t use the special allowance. This is because the special allowance is reduced to $0 since the modified adjusted gross income is over the $100,000 amount.

Modified adjusted gross income for this purpose is your adjusted gross income figured without the following.

• Taxable social security and Tier 1 railroad retirement benefits.

• Deductible contributions to individual retirement accounts (IRAs) and section 501(c)(18) pension plans.

• The exclusion from income of interest from qualified U.S. savings bonds used to pay qualified higher education expenses.

• The exclusion from income of amounts received from an employer's adoption assistance program. • Passive activity income or loss included on Form 8582.

• Any rental real estate loss allowed because you materially participated in the rental activity as a Real Estate Professional (as discussed, later, under Activities That Aren’t Passive Activities).

• Any overall loss from a publicly traded partnership (see Publicly Traded Partnerships (PTPs) in the instructions for Form 8582).

• The deduction allowed for the deductible part of self-employment tax.

• Foreign-derived intangible income and global intangible low-taxed income.

• The deduction allowed for interest on student loans

[superlyc]

@ColeenD3 Yes. I understand. 

In that case, the rental loss become nondeductible and can be carried over to 2022, right? And to carry over that, do I need also file a state tax in the state where the rental property is?

[ColeenD3]

Yes. Once you prepare your Federal return you can see if you can take the loss this year or carry it forward. The loss does not get used against next year's income. It is carried forward.

Any passive activity losses (but not credits) that haven’t been allowed (including current year losses) are generally allowed in full in the tax year you dispose of your entire interest in the passive (or former passive) activity. However, for the losses to be allowed, you must dispose of your entire interest in the activity in a transaction in which all realized gain or loss is recognized. Also, the person acquiring the interest from you must not be related to you.

[superlyc]

@ColeenD3 Thank you so much. To carry forward the loss next year, do I need to file NC state tax (the rental property state) now? I did not make income in NC state this year only rental loss.

[ColeenD3]

Yes, if you are over the $100,000 threshold and know that the loss will not be taken in 2021, then it is a good idea to file for NC. You can just enter the information into the program and you will know where you stand, before downloading an NC return.

[superlyc]

@ColeenD3 Thank you.

[meandmyself206]

Hi,

I am kind of confused with the answers to this question and wanted some additional help. We purchases a rental property in Dec 2021 and paid amount for points, interest, HOA, property taxes etc. approximately $11k. The rental property was advertised but we did not get any rental till Feb 2022. Our AGI is above 150k. How can  deduct 11K out of my total taxes? Also can I also add the depreciation of the property to 11k ? Please advise.

Thanks