rental property losses

[strubi]

Our rental property losses (which are substantial) are not showing in our Federal refund. Can you explain why?

[HelenC12]

It could be due to passive activity loss rules. 

As a general rule, rental properties are, by definition, passive activities and are subject to the passive activity loss rules. These rules are quite complex. In general, the passive activity rules limit your ability to offset other types of income with net passive losses.

But the good news is there is an exception: If you actively participate in a rental real estate activity, you can deduct up to $25,000 of your rental loss even though it’s passive. To actively participate means that you:

• own at least 10% of the property, and
• make major management decisions, such as approving new tenants, setting rental terms, approving improvements and so forth. (No, you don't have to mow the lawn or answer middle-of-the-night phone calls from tenants about a backed-up toilet.)

But this exception phases out as your income rises.

• If you have modified Adjusted Gross Income over $100,000, the $25,000 rental real estate exception decreases by $0.50 for every dollar over $100,000.
• The exception is completely phased out when your modified adjusted gross income reaches $150,000.

Example:

Phil and Mary have modified Adjusted Gross Income of $90,000 and a rental loss for the year of $21,000. They actively participated in the rental. Since their modified Adjusted Gross Income is below the  $100,000 phase-out threshold, their entire rental loss is deductible even though it is a passive loss.

• If their loss had risen to $28,000, they would have been limited to a deductible loss of $25,000 for the  year.
• The nondeductible balance of $3,000 is a passive loss that is carried over to future years until the passive loss tax rules allow it to be deducted.

To read the entire article, click here. 

[strubi]

I fall under the below exceptions, and I actively participate in a rental real estate activity, but the software is still saying that I do not qualify, why?

***************

But this exception phases out as your income rises.

• If you have modified Adjusted Gross Income over $100,000, the $25,000 rental real estate exception decreases by $0.50 for every dollar over $100,000.
• The exception is completely phased out when your modified adjusted gross income reaches $150,000.****

[LindaS5247]

It is very difficult to determine without seeing your screen.  This is a complicated issue with a lot of variables. And I am not sure what type of Business you operate. 

You can click here for information on Turbo Tax Support and connect with a TurboTax Live Agent who can share your screen..

Here are some basic rules to keep in mind, some of these may apply to your situation:

If your rental expenses exceed rental income your loss may be limited. The amount of loss you can deduct may be limited by the passive activity loss rules and the at-risk rules. See Form 8582, Passive Activity Loss Limitations, and Form 6198, At-Risk Limitations, to determine if your loss is limited.

Can you pull up and see a Form 8582 in Turbo Tax? To do so:

Click on Forms in the upper right corner.   Click on Open Form above the list and type in 8582, then click on Form 8582 p1; Passive Activity Loss Limitations and click on Open Form at the bottom.   

Click here for instructions on Form 8582.

Click here for additional information on Form 6198.

The rental real estate loss allowance allows a deduction of up to $25,000 per year in losses from rental properties.

Without passive income, your rental losses become suspended losses you can't deduct until you have sufficient passive income in a future year or sell the property to an unrelated party. You may not be able to deduct such losses for years. In short, your rental losses will be useless without offsetting passive income.

Once the expenses get the taxable income to zero, that's it. Any excess expenses are automatically carried over to the next year.

It is "extremely common" for rental property to have a loss every single year - especially if there's a mortgage on the property

If you take the common deductions of mortgage interest, property insurance, property taxes, and the depreciation you are required to take by law, those four items alone will exceed the total rental income you receive for the year. With each passing year your carry over losses will continue to accumulate, increase and grow. That's fine, it's expected and absolutely normal.  You can't realize all those losses until the year you actually sell the property. Only in the year you sell the property can you deduct your accumulated losses from other "ordinary" income. So until then, your passive carry over losses continue to grow and continue to be carried over each and every year.

I hope this helps, and if not please feel free to come back to TurboTax Community.

Click here for more information on Rental Property.