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Tax Tip · Guest

Most rental owners can claim tax losses, even when they are making a
profit. But it totally depends on how much money you make, and whether
or not your rental activity is considered a passive activity.

Losses from passive activity can only be used to offset income from
other passive activity, so you aren’t able to deduct entire losses in
this case. Many times your losses must be carried forward. If you
materially participate in your rental activity, then your rental
income is not considered to be coming from a passive activity, and you
are able to deduct unlimited losses. This is true for most real estate
professionals who pass the “material participation test.”

The majority of real estate investors however are not real estate
professionals, so the income from real estate is considered passive
income. As a result:

You can deduct up to $25,000 of rental losses on your tax return if
your adjusted gross income is less than $150,000.

If your adjusted gross income is less than $100,000, you can deduct
the full $25,000.

If your adjusted gross income is between $100,000 and $150,000, you
can deduct up to ($150,000 - Your Income)/2. So if your AGI is
$120,000, you can deduct up to $15,000 (150k - 120 k)/2.

When your adjusted gross income exceeds $150,000, you are not
permitted to report a loss from rental activity. The only way to avoid
this limitation is if you become a real estate professional.

If rental losses exceed the deduction limit, the passive activity loss
is carried forward for a maximum of 15 years until the loss can be
deducted. If you sell the property, you can deduct the carryover loss
from the gain of the sale. To learn more about deductible loss and how
it affects your Schedule E, take a look at RealTaxTips.com (
http://www.trexglobal.com ). It’s a forum for real estate investors to
learn how others are saving money on their real estate investments,
and it’s an easy way to get prepared for taxes.

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