Dear Tax Talk,
Is it true that you cannot deduct your negative loss (on Schedule E) from your rental property if your
total income (net or gross) exceeds $150,000?
For most folks, the tax law limits rental property losses from offsetting other income when their modified
adjusted gross income exceeds $150,000. The limitations have been around for more than 20 years.
A rental real estate activity is considered a passive activity. Losses from continuing passive
activities can only offset income or gains from passive activities. When a passive activity is completely disposed
of in a fully taxable transaction, any unused losses can be offset against other income.
If you or your spouse actively participated in a passive rental real estate activity, you can
deduct up to $25,000 loss from the activity from your nonpassive income.
This special allowance is an exception to the general rule disallowing losses in excess of income
from passive activities. The maximum amount of the special allowance is reduced if your modified adjusted gross
income is more than $100,000.
The $25,000 maximum deduction is
reduced by 50 cents of every dollar your modified
adjusted gross income exceeds $100,000. For example,
if your modified adjusted gross income is $110,000,
you would reduce the $25,000 limit by one half
of the $10,000 excess, or $5,000, so that your
maximum deduction from the rental activity would
Any losses you cannot claim currently are accumulated and carried over to future tax years. The
accumulated carry-forward losses are allowed in future years under the following circumstances:
|Accumulated carry-forward losses allowed in future years:
||Against passive income,
||As part of the $25,000 special allowance or
||Against other income if the activity is disposed of in a fully taxable transaction.
527 for a discussion of the passive rules
and the modifications to adjusted gross income.