$25k Passive Loss to Offset Ordinary Income

[Manson C.]

Hello. My adjusted gross income is under $100,000, and so the passive loss (including phantom loss from depreciation, deductions from mortgage interest and property tax, etc.) from my rental properties will be offsetting my ordinary income by a maximum of $25,000 each year. Any offset above the $25,000 each year is carried over to the following year.

Since I plan on keeping those rental properties, I anticipate to be maxing out the $25,000 of offset each year. In this case does it even make sense for me to acquire more rental properties in the future? Passive loss coming from any additional rental properties will not provide additional tax benefits, since I will already be maxing out the $25,000 of offset each year. Am I thinking about this correctly?

[Brandon Hall]

@William Jenkins just wanted to correct a few things here.

First off, rental property is passive and generates passive income as long as the rental period is greater than 30 days on average. Even if qualifying as an RE pro, it's still passive income and thus not subject to SE taxes.

You actively participate in a rental activity if you make management decisions. This does not make the income "ordinary income" it just means you actively participated.

The only time you are literally a passive investor is when you invest in a syndication or some group investment where you have little-to-no say and you don't make management decisions.

If you manage your own rentals, or manage the property manage who manages your rentals, you are deemed to be actively participating in your rental activity. Your rental activity will generate passive income or losses but you are still actively participating.

If a passive loss is generated, you have a $25k cap on the passive losses that can be applied against your ordinary income. There is no $3k loss limitation - this limit is on capital losses generated by portfolio (not passive) holdings.

Hope this helps clear things up.