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George Saenz, the Tax Talk columnistLosses from rental real estate

Dear Tax Talk,
We live in Michigan and own a condo in Naples, Fla., that we rent out mostly seasonally. We spend, at most, two weeks at our condo a year. Our income is greater than $150,000. Are we able to deduct rather than depreciate our "losses" on any of these expenses for upkeep, interest, etc. on our home in Florida? Secondly, what are the tax benefits (if any) in establishing the condo in an LLC?
-- Beth

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Dear Beth,
You might be getting some of your terminology mixed up. You depreciate the cost of the unit, which forms part of your deductions. If your deductions, including depreciation, interest and upkeep, among other things, exceed your rental income, you have a loss from rental real estate.

If your adjusted gross income is greater than $150,000, you are not allowed to deduct your losses from the rental real estate activities against other forms of income such as salaries and investment income and gains. Instead, these losses carry over to a year when your income falls below the $150,000 limit (in which case you can use part of the losses, depending on how far below the $150,000 threshold you go) or when you sell the property.

In general, you can deduct up to $25,000 in rental real estate losses if your adjusted gross income is below $100,000. If your AGI is between $100,000 and $150,000, the $25,000 limit is reduced $1 for every $2 your AGI exceeds $100,000. So, for example, at $120,000 in AGI, the maximum loss you can take from rental activities is $15,000 (maximum of $25,000 reduced by $10,000).

Therefore if your income is always expected to exceed $150,000, you won't benefit from the losses on the property until you sell it. At that time you can deduct all the carry-over losses in that year, even if the losses exceed the gain on the sale.

All this is assuming that you spend no more than 14 days at the Naples apartment; otherwise you might get thrown into the vacation-home rules, which would limit how much you can deduct in total. That's a separate topic -- altogether.

Ownership through an LLC does not create any tax advantages, as the loss limitations apply to rental activities that are passed through to you from the LLC.

To ask a question on Tax Talk, go to the "Ask the Experts" page, and select "taxes" as the topic.'s corrections policy -- Posted: June 29, 2006
Read more Tax Adviser columnsAsk a question
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