$25,000 loss, tax cap?

Question

I just came from my CPA's office where I was informed that there was a $25k loss limit for write-offs for a rental property.

I Have spent the past year and $70k repairing and remodeling a 4-plex I bought in Jan 2016. I have well over $50k in write-offs. My CPA said that the govenment has imposed a limit on how much of a loss a property can take per year. "Even if you had a 100 unit apartment complex, you would still only be able to take a $25k loss in one year," he said to me. "No matter how much you spent on repairs."

I have never heard of this before and on this large of an IRS bill this new law, has upset my financial plan for this project by a very large amount... at least for me. My questions are these:

Can anyone site me this rule so that I can study it? and,

Is there a way that I can still write off everything that I wanted to this year?

Russell Brazil · Answer

@Brandon Hall is a CPA that can get into the nitty gritty.....but passive losses are capped of you do not qualify as a real estate professional. They do carry forward to take at a later date. Also the $25k passive loss can only be taken if your agi is under $100k, and then begins to phase out gradually til it is not available at an agi of $150k. This is not a new law. The date on the IRS guidance on this is 2004.

https://www.irs.gov/businesses/small-businesses-self-employed/passive-activity-loss-atg-chapter-2-rental-losses

Dave Toelkes · Answer

@David Egan,

It is not really clear from your post what you are doing.  Are you planning to hold for rental use or is this a property you plan to flip?

If holding for rental income, then your CPA probably should have told you that all of your costs to make a property ready and available for rent are added to your cost basis and recovered through depreciation once the property is placed in service as a rental.

I am guessing that your "repair and renovation" was done to make the property ready and available for rent.  Under the IRS rules, repairs done as part of a larger renovation project are deemed to be part of a capital improvement project/  These costs are not expensed.

Your CPA is probably referring to the net passive loss allowance (IRC § 469(i)(8)) that sets a $25K limit on the amount of net passive losses you can take against other ordinary income.  This is not a new law.  I don't remember when this rule was implemented, but I seem to remember applying this rule for the first time on my 1987 tax return.

Jamie Engledow · Answer

As previous poster said, it appears much of the repairs you put out will probably be capitalized to the basis of the property and depreciated.  Any part of the current loss in excess of the $25,000 is not neccessarily lost, but carried forward to subsequent years.  Ie., you had a current year loss of $100,000, but were only allowed to take $25,000 this year.  If next year, you had a $100,000 income, you could use your remaining $75,000 of loss from previous year to offset that years income.  Example for simplicity sake, certain circumstances such as AGI over $150,000 could change scenario.

Patrick Liska · Answer

David, i'm sure that at the cost you are explaining, that a lot of the work is capitol improvements. those capitol improvements add to the basis of the property and are depreciated over 27 1/2 years. If you were selling the house you could deduct all the capitol improvements. try to break out the costs between capitol improvement and repairs, the repairs you can deduct up to that limit.

$25,000 loss, tax cap?

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