Rental losses: deductible?

A person owns and operates a few (or even several) rental properties and after apply all of the operating expenses (e.g. mortgage interest, real estate taxes, cleaning/maintenance, management fees, etc.), including depreciation, and resulting an operating loss (or losses) on the rental properties, the question becomes is it possible to claim the rental loss(es) on the federal tax return, against other sources of income? The answer is, it is possible with certain limitations.

The history of claiming rental losses is that during the 1980’s, there was a scramble to purchase real estate, so that rental losses could be claimed against income on a federal tax return, but Congress put a stop to that by imposing limitations on rental losses in 1986. First of all, owning and operating a rental property is by definition in the federal tax code as a “passive activity” (no matter how activate a person is on his/her rental properties), and if a person has losses in a “passive activity” these losses can only be claimed against net income from other “passive activities”, and wages, interest, dividend, investment, retirement income, and social security income are not income sources from “passive activities”. Secondly, if there isn’t any net income from “passive activities”, then the rental losses are suspended or carry forward to the following year until there is net rental income or net income from other “passive activities”, or the rental properties are sold, and any of the suspended loss are “unleashed” and is added as part of the purchase costs of the rental properties, thusly lowering any gains, or even producing a deductible loss on the sale of the rental properties.

However, there are two exceptions to the “passive” rules on rental losses. One exception is that there is an allowance of up to $25,000 ($12,500 for those married filing separately) to claim rental losses, subject to income limitations. Another exception is that to hold out as “real estate professional”, and the requirements to be a “real estate professional”:
1. Must materially participate in the rental property (which is usually fulfilled by owing and fully operating);
2. More than one-half of the personal services must be performed on the rental property by the owner/operator him/herself; and
3. The owner/operator must perform more than 750 hours of services in a year on the rental property.
Not an easy requirement to meet, especially if the owner/operator of the rental property has a regular full time job and/or business to manage.

If you need assistance to see if some of your losses on your rental properties could be claimed, or need help to calculate the suspended losses, especially if you are about to sell your rental properties, or even believe you can be a “real estate professional”, then please contact us at , so we can assist you in dealing with your rental losses. Also click here for a full list of all the tax help we offer.