How do rental losses work if income is over $150?

[Arthur Schwartz]

Hi there!  I am interested in how rental losses work if income is over $150K and if not a real estate professional.  First, I suppose that these losses can be carried forward but how are they eventually taken?  Only in the year of sale of that property? What if a different property is sold; can the loss carryforward from property A somehow offset a capital gain on property B?  Second, is the accumulated loss offset against W2 income or offset against capital gains?   Third, say one property is cash flow negative, another cash flow positive?  Are all properties looked at as a group?  (If these questions are basic, please forgive me.)  If there's is a simple illustration with hypothetical numbers, it would be appreciated.  Thank you!  (Rental loss = repairs or renovations exceeding rental income)

[JD Martin]

Quote from @Arthur Schwartz:

Hi there!  I am interested in how rental losses work if income is over $150K and if not a real estate professional.  First, I suppose that these losses can be carried forward but how are they eventually taken?  Only in the year of sale of that property? What if a different property is sold; can the loss carryforward from property A somehow offset a capital gain on property B?  Second, is the accumulated loss offset against W2 income or offset against capital gains?   Third, say one property is cash flow negative, another cash flow positive?  Are all properties looked at as a group?  (If these questions are basic, please forgive me.)  If there's is a simple illustration with hypothetical numbers, it would be appreciated.  Thank you!  (Rental loss = repairs or renovations exceeding rental income)

 If you are a high earner, you generally want to get advice from a CPA that understands real estate income & taxes, but here's a few thoughts:

1. Losses are going to offset future income. Your basis in the home is not going to change so when you sell you're still going to recapture depreciation and pay capital gains unless you 1031 or you don't have any gains.

2. Income losses doesn't offset capital gains so that should answer that batch of questions in the middle. 

3. Losses don't offset W2 income unless you can qualify as a RE professional. If you are married and have a partner that doesn't work, you may be able to do this if you keep good records and are essentially managing the properties yourself. 

4. Income is going to be in the aggregate, so yes if you have 3 properties netting $10k each and one property that loses $30k your net income is $0. 

*Most* of the time, especially early in your investing, you can book enough losses to offset income between improvements, depreciation, taxes, insurance, mortgage interest, vacancies. Once you start getting a good number of properties this becomes more difficult unless you're constantly buying wrecks that you can book big losses during the year. This was how I did it until I retired.