Do I need a partnership LLC to depreciate and write off expenses on a rental property

[David Cherkowsky]

I purchased a rental property earlier this year, and it will be my first year not taking the standard deduction. I met with a tax professional I found through BP, and in our planning call, she mentioned that if you are filing single, and make over ~$80k, then you cannot write-off any expenses associated with a rental property, or depreciate the property. The only tax benefits would be taxes and interest. 

She said to be able to use depreciation and write-off expenses, I would need to create a partnership LLC and have someone else be at least a 1% owner in the LLC.

I've read a few books on real estate tax planning now, but recognize there is a lot that I don't know. I'm mostly looking for a sanity check that this is required.

Thanks in advance for the responses...

[Jason Malabute]

Hi David,

It sounds like there might have been a mix-up in what the accountant was explaining. I think they might have been referring to the Passive Activity Loss (PAL) limitations. With rental real estate, you can usually deduct up to $25,000 in passive losses, like depreciation and expenses, if you actively participate in the rental activity.

But here’s where income comes into play: if your modified adjusted gross income (MAGI) is $100,000 or less, you can take the full $25,000 deduction. Once your income gets between $100,000 and $150,000, that deduction starts to phase out and is completely gone by the time you hit $150,000. So, if your MAGI is over $150,000, you won’t be able to take those passive losses against other income, like your wages.

There isn’t actually an $80,000 threshold in the tax rules as far as I know, so that part might have been a misunderstanding. Hope that helps clear things up! Let me know if you have more questions about it.