Dealing with paper losses

[Ezra Nugroho]

With my rentals, I generate paper losses from operating expenses, repairs and depreciation. However, because of having 2 incomes in the household, my wife and I got phased out, and I cannot claim those losses against my w2 income. Now it seems that those losses are allowed to deduct gains from other passive activities. But what are the passive activities that are eligible to deduct the paper losses from?

I once thought that capital gains from stock investments can be negated from RE losses, but a friend of mine said that it's not eligible. 

So what other passive activities are actually eligible to be counted against RE paper losses ? Income from other rentals?

Other than being a real estate professional and spending 750 hours on it, what can someone do to realize the paper losses? Or just don't even bother?

[Charles Press]

A "paper loss" is unrealized loss.  Example, You purchase shares in a company for $1,000.00.  Several weeks later, your shares have a market value of just $850.00  You now have an "unrealized or paper loss" of $150.00  It's call a paper loss because you have lost it on paper but not "realized" it.  Because you still holding the shares.

From reading your question, I think what your saying is you have a passive losses.  Quite common in real estate investing.  You may even have positive cash flow and net income BEFORE depreciation of the property.  But depreciation will show you having a passive loss for tax purposes.

Passive losses can only be deducted from other passive income sources.  (Capital gains and dividends from stocks are not passive).  If you don't have other passive income to off set, you may carry over your loss to next year.  

If you are a "real estate professional" you may be able to deduct passive losses.  To be a real estate professional, you must A) spend over half your working hours in a year working on real estate.  So if your employee full time elsewhere, you're likely out.  B) You must have spent at least 750 hours a year on real estate activity.  So you can't just the 100 hours you spent in a year managing your properties makes you a real estate professional. 

Disclaimer: As with all tax questions, everybody situation is different and you should ask your own tax adviser.