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George Saenz, the Tax Talk columnistAMT and deduction limitations

Dear Tax Talk,
Our AGI (adjusted gross income) is over $200,000 so our CPA says the AMT hit us hard this year and we cannot take the deduction for property taxes on our main residence. This is the only property we own, and we do itemize. Does this sound correct?

We also wanted to buy some rental property. But the CPA says we will not get any rental write-offs during the time we hold it until we sell the property. Then we can deduct any expenses (upkeep, interest, taxes, management fees, etc.) against any gains in the sell price. Does this sound right?
-- Dawn

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Dear Dawn,
The alternative minimum tax is a secondary system of taxation that takes away some of the tax benefits that the regular income tax provides. Items that are not deductible for alternative minimum tax are your state and local income taxes and your real property taxes (in fact, all Schedule A tax deductions are not allowed for the AMT). So although you may deduct your residence's taxes, it does not provide you any tax benefit since you are in AMT.

Rental real estate is considered a passive activity. A loss from a passive activity, generally, cannot be used to reduce other types of income. Hence any unused current losses (rental expenses in excess of rental income) are carried forward until the year that you can use them against passive income, such as gain on the sale of rental properties.

An exception to this general rule is if your AGI is in the range of $100,000 to $150,000. If your AGI is $100,000 or less, you can write off up to $25,000 in rental real estate losses (current and prior year) against salary and other types of income. For every $2 your AGI exceeds $100,000, the $25,000 allowance is reduced by $1. Hence, if your income is expected to continue at around $200,000, you will not get any current tax benefit from the rental property losses until you sell. If you're a real estate professional (generally, a Realtor or developer), the limitations on rental losses do not apply to you.

To ask a question on Tax Talk, go to the "Ask the Experts" page, and select "taxes" as the topic.'s corrections policy -- Posted: April 19, 2006
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