Vacation condos in Avon, Colorado © iStock

Dear Tax Talk,

We own a home we live in, a second home in Colorado and a rental condo, also in Colorado. My taxes for 2014 show zero deductions for the rental condo. I don’t understand why. We are keeping this rental property as an investment, but if we don’t get any tax advantage, why would we keep it? Thanks for your opinion.

— Fay

Dear Fay,

While you may have been limited in deducting your rental loss on your 2014 tax return, the losses may just be “suspended” for the time being until such time you will receive the tax benefits.

Not having your actual tax return in front of me, I can only speculate what is happening on your return.

You report rental activities on Schedule E, Supplemental Income and Loss. As you will see, you list the rental income for each property along with the specific expenses related to the property, including depreciation, which is listed on Part 1, line 18. You may have run into a problem at Part 1, line 22, due to the “deductible rental loss after limitation” that was calculated on Form 8582, Passive Activity Loss Limitations.

What is a passive activity?

A passive activity is a trade or business activity in which you do not materially participate during the year. You materially participate if you are substantially involved in the activity on a regular basis. Rental activities are considered passive, even if you do materially participate in them, unless you are a real estate professional.

Source: IRS.gov

Rental property is generally considered to be a “passive activity” and there are limitations on the amount of losses you can deduct above any “passive gains” you have. On Form 8582 in Part II there is a “Special Allowance for Rental Real Estate Activities with Active Participation.” There you will see that if you file a joint return and your income is below $150,000, some of the loss may be deductible. But all is not lost if your income is above the $150,000, as the tax losses are “suspended” until future years. You will receive your deductions either when the property is sold or when your income falls below the $150,000 threshold.

My suggestion at this point is to sit down with a tax professional who can assist you in looking at your specific situation and help you figure out what is best for you and your investment property.

Thanks for the great question and all the best to you.

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