Real Estate Passive Activity Loss Rules and Deducting Rental Income Losses

When purchasing income property, your occupation and role in the management of your property will determine how much you can write off in rental losses each year on your tax return. If you have recently purchased an income producing property and the property will have a negative rental income, be sure to check with your accountant or legal advisor to determine if you qualify to write off rental losses. The Internal Revenue Service views the income from rental properties as passive income and applies special passive activity loss rules to that income. Do not use this article as a substitute for professional advice. Note: If the income property that you are purchasing has a positive income, your occupation and role in the management of the property doesn’t matter. The positive income from the property will be taxed the same in all situations, as ordinary income.

Real Estate Professionals – Real estate professionals can write-off all rental losses in the year of the loss on their tax return. No rental losses are carried forward, they are written off in the year of the loss. You must meet IRS guidelines to claim real estate professional status. The IRS guidelines for claiming real estate professional status can be complicated depending on your situation. Be sure to consult with your accountant or attorney to determine if you qualify to claim real estate professional status. Passive Participants – If you own part or all of an income property and do not actively participate in the management of the property, you are not allowed to write off any rental losses in the year of the loss on your tax return. Your rental losses build-up from year-to-year until you have rental income to offset the losses or you sell the property. When you sell the property, you can write-off all unused rental losses that have accumulated while you have owned the property. Active Participants – If you own income property and actively participate in the management of the property and your adjusted gross income is less than $150,000, you can write off up to $25,000 in rental losses. For an adjusted gross income of $100,000 or less, you can write off $25,000 in rental losses. The amount of rental losses that you can write off is proportionately phased out between $100,000 and $150,000. For example, if your adjusted gross income is $125,000, you can write off $12,500 in rental losses in the year of the loss. If you are an active participant and your adjusted gross income is $150,000 or more, you can write off no rental losses on your tax return in the year of the loss. Be sure to verify IRS guidelines if you are going to claim active participant status. Note: When you sell your income property, you can write-off any unused rental losses that have accumulated while you have owned the property.

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