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Columns: Tax Talk
George Saenz, CPA   Expert: George Saenz, CPA
Tax Talk
When to offset property losses with other income
Tax Talk

Deducting rental losses
 

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?
-- Nhan

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Dear Nhan,
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 be $20,000.

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:
1. Against passive income,
2. As part of the $25,000 special allowance or
3. Against other income if the activity is disposed of in a fully taxable transaction.

See Publication 527 for a discussion of the passive rules and the modifications to adjusted gross income.

Bankrate.com's corrections policy -- Posted: July 22, 2008
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