Deducting rental property losses

1 min read


Dear Tax Talk,
My husband and I bought a house together that we are living in. Recently, I (not with my husband) bought a rental property. Our annual income is over $150,000. Should I file the income tax separately using Schedule E for the rental unit? And should my husband file income tax separately using Schedule A for the residential home? Thank you.
— Joann


Dear Joann,
Well, you have obviously done your homework and know that rental real estate losses — referred to as passive activity losses — are not allowed for married (and single) taxpayers whose adjusted gross income, or AGI, exceeds $150,000 per year. An exception exists for real estate professionals, which apparently is not the case here.

Normally, passive losses are not allowed to offset income from nonpassive activities, such as salaries and investment income –although investment income seems passive, it is not considered passive for the purpose of these rules. An exception exists that allows taxpayers a special allowance of up to $25,000 in rental real estate losses against all types of income if their adjusted gross incomes do not exceed $100,000. For every $2 in AGI in excess of $100,000, $1 of the special allowance is reduced, so that at $150,000 in AGI there is no passive loss allowed.

For example, if a married couple has an AGI of $120,000, they can claim up to $15,000 in passive losses from rental real estate activities that they actively manage. If their actual losses are less than $15,000, they can claim up to the actual loss. If the losses exceed $15,000, the balance is carried forward to future years when they can utilize it either because of the special allowance or if they have gains from passive activities.

A married couple that files separately has no special allowance unless they lived apart for the entire year. Hence, your idea will not work unless you move into the rental property, in which case it won’t be a rental any longer.

To ask a question on Tax Talk, go to the ”
Ask the Experts” page and select “taxes” as the topic.