Use rental losses against other income?

Question

I'm sure this is asked elsewhere but I wasn't able to find it.  I found some things online, but I trust these boards more than the wild web.

I have a single family rental.  With depreciation, sometimes it's slightly positive, sometimes negative on my tax return.  The question is, can I use the negative return to offset any other tax burden?

1. carry it forward to a future year? (pretty sure this one is real)
2. use it that year to offset other investment returns? (stock, note interest, etc.)?
3. continue to carry it forward until I eventually sell and use it somehow to offset something then?

all those things?  Some? None?

Thanks,Bill

Linda Weygant · Answer

Here's how it all works.  You don't really "choose" which method to use.  Certain situations come into play depending on your personal tax situation.

1.  100% of all profits are reported and taxed all the time.  Nothing mysterious here.

2.  Any losses are 100% deductible against all of your other income if your total income is less than $100,000.

3.  Any losses are fully or partially deductible against all of your other income if your total income is between $100,000 and $150,000.  There is a calculation used to figure out how much is deductible.  Anything that is not deductible is rolled forward to the following year.

4.  If your other income is higher than $150,000, then none of your losses are deductible in the current year unless you qualify as a Real Estate Professional (addressed in item 6 below).

5.  To the extent that any of your losses roll forward, then here's what happens to them the following year:

a.  They become deductible against any rental profits you may have to bring those profits back down to zero to the extent losses are avaiable to do so.

b.  If your income dips down below $150,000 (or $100,000), then the same test is used as above.  Fully deductible if income is under $100,000 - partially deductible if under $150,000.

c.  You sell the property.  At this point, regardless of your other income, all prior and current year losses for that property are unlocked.

6.  To qualify as a Real Estate Professional, you must work in Real Estate Related activitied for 750 hours per year or more.  You must do real estate activities MORE THAN any other combination of activities.  So if you have a full time W2 job, that's 2040 hours per year.  You must then do real estate activities for 2041 hours.  You must also have written documentation to take this position.  A diary, a journal or other proof of the hours you are using to qualify.

Linda Weygant · Answer

@Bill Ramsour

Following is a non-exhaustive list for the types of things that qualify towards hours as a RE Pro.

1.  Making repairs to your rental property2.  Managing tenants - screening, interviewing, discussing rent collections, etc.3.  Bookkeeping for your rentals and other admin tasks, such as going to the bank, paying bills, etc.4.  Managing the property manager - periodic meetings, discussions, etc.  Reviewing property management reports5.  After you are under contract on a rental - attending inspections and closing, negotiating with the seller, discussing the transaction with your agent, etc.6.  Travel time for all of the above (some exceptions apply - this one's not automatic)

Also, here is a non-exhaustive lists of the types of things that DON'T qualify towards hours:

1.  Researching and investigating your next purchase.  Analyzing the numbers and reviewing PRIOR TO going under contract.2.  Attending meetups and networking events for RE investors.  (I know - this one makes me sad too.  I'd qualify just based on this if it were legit)3.  Working in an RE adjacent field.  Being a plumber does not mean that it's RE Pro hours.  Working on the plumbing on your rental, would qualify though.  Likewise, being a mortgage broker does not qualify (this one was actually just tested in court in 2017)

For the bucket of losses, all passive losses get netted together in a given year, so all rental properties, Oil & Gas Royalties, etc - all get lumped together for the purposes of determining whether you've got an overall Net Passive Loss.  There are ways to group and segregate Passive Activities for other purposes though.Notes are interest income.  So while this is Investment Income, it's not Passive Income (for the strict IRS definiton of the term).

Likewise stock investing is Capital Income, not Passive Income, under the same definition.

But your rental property will combine with your passive RE Venture, in you example as those both fall under the definition of IRS Passive Income/Loss.

Bill Ramsour · Answer

Thanks again, this is super helpful.

Bill Ramsour · Answer

Thanks for all this info!  It's super helpful. A quick follow up to:4.  If your other income is higher than $150,000, then none of your losses are deductible in the current year unless you qualify as a Real Estate Professional (addressed in item 6 below).

do you know what things are grouped together within this bucket of losses.  Meaning I'd assume things in the same category all count for/against each other, and it only becomes non-deductible if the total for this category goes negative.  Owning multiple rentals seems like a fairly obvious (I hope) situation where the net is what matters (imagining one was positive and one negative).  What about owning a loosing rental and a profitable portion of a crowd funded real estate venture?  Or investing in notes?  stock?

Again, thanks so much for your help.  this is great

Linda Weygant · Answer

Yes, you are exactly correct about the $25,000 and your example of how it is used.  I was so focused on outlining my answer, I forgot to mention that.  I have edited my post to include it.  Thanks!

Daniel Dietz · Answer

@Linda Weygant

In #2 above with income under 100K, aren't your 'losses' limited? I have read (which can be dangerous at times ;-) ) that you can only deduct up to what puts at ' -25K'.

I have always assumed that this means if I make say 40K at my W-2 job and have a lot of rentals which with depreciation (or say a Cost Segregation Study) show a loss of 50K I can take my taxable income down to $0 and then actually down to a -10K, but if those losses were 80K, I could only go down to -25K, and then the remaining 15K would have to be carried forward.

Thanks, Dan Dietz

Eric Martel · Answer

This is really specific to your situation so you should consult your CPA. Typically you can only use it to offset your passive income and not your ordinary income. Unless you are a real estate professional which basically you do real estate investment for a living. Even if you are not a real estate professional you may be able to offset your ordinary income up to $25k as long as your Adjusted earnings are less than $100k or something.

1. and 3. I am not sure about the carry it forward rules.

2. Stock and notes interest would most likely be considered passive income so you should be able to offset them.

Always consult your CPA because there are so many rules that may be true for one individual doesn't apply to another.

Use rental losses against other income?

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