Real estate losses to reduce your taxable income & Amount of Losses You Can Offset Passive Activity Losses: Generally, losses from rental real estate are considered passive. This means you usually can’t use them to offset other “non-passive” income like wages, interest, or dividends. Active Participation Exception: If you actively participate in your rental real estate activity and your Modified Adjusted Gross Income (MAGI) is below $100,000, you might be able to get a renal losses tax deduction up to $25,000 of rental real estate losses against other income. This phases out between $100,000 and $150,000 of MAGI. Real Estate Professional: If you meet the 750-hour rule and the “more than 50%” test for real estate professional status, your rental losses are generally “non-passive” and can be fully used to offset other types of income. You may wish to use our free online income tax estimator if you have US taxable income. 250-Hour Rule: Section 199A "Safe Harbor" Relevance to Losses: While the 250-hour rule is primarily about qualifying for the Section 199A deduction on business income, it doesn’t directly impact your ability to deduct rental property losses. It’s more about potentially claiming that 20% business income deduction under Section 199A. Tax Form Impact: If you meet the 250-hour rule, it will affect your Section 199A computation, which you’d report on Form 8995 or Form 8995-A, and ultimately, on your 1040. However, the rule itself doesn’t change how you’d report or deduct rental losses on Schedule E or Form 8582. 750-Hour Rule: Real Estate Professional Status Relevance to Losses: This one’s a biggie for property losses. If you qualify as a real estate professional, your rental real estate losses are generally no longer considered “passive.” That means you can use them to offset other types of income (like W-2 wages), without the limitations typically imposed on passive losses. Tax Form Impact: If you meet this threshold, you can potentially bypass the need for Form 8582, “Passive Activity Loss Limitations,” for these activities. Instead, your losses would flow directly from Schedule E to your Form 1040, impacting your adjusted gross income (AGI). Costs That Typically Can't Be Included on your rental property Principal Payments: Mortgage principal payments aren’t considered a deductible rental expense when calculating your loss. Capital Improvements: Upgrades or renovations that extend the useful life of the property are usually capitalized and depreciated over several years, rather than immediately deducted as an expense. Land Cost: The cost of the land upon which your rental property sits isn’t a deductible expense. You’ll need to separate the cost of the land from the building when you’re calculating depreciation. Selling Costs: Costs related to selling the property, like broker commissions or advertising costs, can’t be included in the loss calculation for the $25,000 loss exception. Startup Costs: Costs incurred before the rental property is actually available for rent aren’t typically considered in calculating the current year’s loss. These costs may be capitalized and amortized. Personal Use: If you use the property for personal purposes for more than the greater of 14 days or 10% of the days it was rented at fair market value, you’ll need to allocate expenses between rental and personal use. Personal use expenses can’t be counted towards the $25,000 loss. Travel Costs for Personal Use: Any travel costs that aren’t solely for the maintenance and upkeep of the property can’t be included. If the trip combines personal activities with rental activities, you’ll need to allocate the costs. Non-Deductible Legal Fees: Legal fees related to the purchase of the property or other capital expenses aren’t immediately deductible. Home Office: Costs related to a home office might be deductible as a business expense, but they’re generally not counted when calculating the $25,000 rental real estate loss exception. Leisure Amenities: Costs for amenities considered “luxuries,” like a swimming pool or satellite TV service, could be scrutinized by the IRS if these are not common for rental properties in your area. Owner’s Compensation: You can’t pay yourself a salary for time spent working on your own rental property and then deduct that as an expense against rental income. Buy-and-Hold Investor with Depreciation: Scenario: Emma purchases a single-family rental property for $300,000 (excluding land value). The property is put into service, and she starts depreciating it over 27.5 years, leading to an annual depreciation deduction of around $10,909. Outcome: The rental income Emma receives, after other expenses, is $12,000 annually. However, after factoring in the depreciation deduction, her taxable income from this property is reduced to just $1,091. Real Estate Professional Status: Scenario: Sofia and Max, a married couple, invest in multiple rental properties. Max works a regular job, but Sofia spends more than 750 hours a year in real estate activities and doesn’t have another occupation. This qualifies her as a “real estate professional” for tax purposes. Outcome: Typically, passive losses from rental activities are limited. However, as a real estate professional, Sofia can deduct unlimited rental losses against other income. If they have passive losses (after all deductions including depreciation) of $50,000 and Max has a W-2 income of $100,000, they can offset their total income, reducing it to $50,000. I'm not a real estate professional. How does that affect my ability to deduct rental losses? If you're not a real estate professional, rental activities are typically considered passive. This means losses can only be deducted against passive income. However, there are exceptions for active participation, as mentioned above. What happens if my adjusted gross income is above $150,000? The ability to deduct rental losses against other income phases out between an adjusted gross income of $100,000 and $150,000. If it's above $150,000, you generally can't deduct the losses unless you're a real estate professional. Can I carry forward rental property losses that I couldn't deduct this year? Yes, if you can't deduct all of your rental losses due to the income limit, you can carry forward the unused losses to the next year. Are there any special forms I need to fill out to claim rental property losses on my income tax? Yes, rental income and expenses, including losses, are typically reported on Schedule E (Supplemental Income and Loss) of your federal tax return. I'm not a real estate professional. How does that affect my ability to deduct rental losses? If you're not a real estate professional, rental activities are typically considered passive. This means losses can only be deducted against passive income. However, there are exceptions for active participation, as mentioned above.
Real estate losses to reduce your taxable income & Amount of Losses You Can Offset Passive Activity Losses: Generally, losses from rental real estate are considered passive. This means you usually can’t use them to offset other “non-passive” income like wages, interest, or dividends. Active Participation Exception: If you actively participate in your rental real estate activity and your Modified Adjusted Gross Income (MAGI) is below $100,000, you might be able to get a renal losses tax deduction up to $25,000 of rental real estate losses against other income. This phases out between $100,000 and $150,000 of MAGI. Real Estate Professional: If you meet the 750-hour rule and the “more than 50%” test for real estate professional status, your rental losses are generally “non-passive” and can be fully used to offset other types of income. You may wish to use our free online income tax estimator if you have US taxable income. 250-Hour Rule: Section 199A "Safe Harbor" Relevance to Losses: While the 250-hour rule is primarily about qualifying for the Section 199A deduction on business income, it doesn’t directly impact your ability to deduct rental property losses. It’s more about potentially claiming that 20% business income deduction under Section 199A. Tax Form Impact: If you meet the 250-hour rule, it will affect your Section 199A computation, which you’d report on Form 8995 or Form 8995-A, and ultimately, on your 1040. However, the rule itself doesn’t change how you’d report or deduct rental losses on Schedule E or Form 8582. 750-Hour Rule: Real Estate Professional Status Relevance to Losses: This one’s a biggie for property losses. If you qualify as a real estate professional, your rental real estate losses are generally no longer considered “passive.” That means you can use them to offset other types of income (like W-2 wages), without the limitations typically imposed on passive losses. Tax Form Impact: If you meet this threshold, you can potentially bypass the need for Form 8582, “Passive Activity Loss Limitations,” for these activities. Instead, your losses would flow directly from Schedule E to your Form 1040, impacting your adjusted gross income (AGI). Costs That Typically Can't Be Included on your rental property Principal Payments: Mortgage principal payments aren’t considered a deductible rental expense when calculating your loss. Capital Improvements: Upgrades or renovations that extend the useful life of the property are usually capitalized and depreciated over several years, rather than immediately deducted as an expense. Land Cost: The cost of the land upon which your rental property sits isn’t a deductible expense. You’ll need to separate the cost of the land from the building when you’re calculating depreciation. Selling Costs: Costs related to selling the property, like broker commissions or advertising costs, can’t be included in the loss calculation for the $25,000 loss exception. Startup Costs: Costs incurred before the rental property is actually available for rent aren’t typically considered in calculating the current year’s loss. These costs may be capitalized and amortized. Personal Use: If you use the property for personal purposes for more than the greater of 14 days or 10% of the days it was rented at fair market value, you’ll need to allocate expenses between rental and personal use. Personal use expenses can’t be counted towards the $25,000 loss. Travel Costs for Personal Use: Any travel costs that aren’t solely for the maintenance and upkeep of the property can’t be included. If the trip combines personal activities with rental activities, you’ll need to allocate the costs. Non-Deductible Legal Fees: Legal fees related to the purchase of the property or other capital expenses aren’t immediately deductible. Home Office: Costs related to a home office might be deductible as a business expense, but they’re generally not counted when calculating the $25,000 rental real estate loss exception. Leisure Amenities: Costs for amenities considered “luxuries,” like a swimming pool or satellite TV service, could be scrutinized by the IRS if these are not common for rental properties in your area. Owner’s Compensation: You can’t pay yourself a salary for time spent working on your own rental property and then deduct that as an expense against rental income. Buy-and-Hold Investor with Depreciation: Scenario: Emma purchases a single-family rental property for $300,000 (excluding land value). The property is put into service, and she starts depreciating it over 27.5 years, leading to an annual depreciation deduction of around $10,909. Outcome: The rental income Emma receives, after other expenses, is $12,000 annually. However, after factoring in the depreciation deduction, her taxable income from this property is reduced to just $1,091. Real Estate Professional Status: Scenario: Sofia and Max, a married couple, invest in multiple rental properties. Max works a regular job, but Sofia spends more than 750 hours a year in real estate activities and doesn’t have another occupation. This qualifies her as a “real estate professional” for tax purposes. Outcome: Typically, passive losses from rental activities are limited. However, as a real estate professional, Sofia can deduct unlimited rental losses against other income. If they have passive losses (after all deductions including depreciation) of $50,000 and Max has a W-2 income of $100,000, they can offset their total income, reducing it to $50,000.
