Passive income negative, do I even bother rental income taxes?

Question

Properties generated $110K last year, I stopped at $120K losses before even going into expenses. I don't want to dig through expenses and itemize all that crap since I'm already at no income. So do I even need to file taxes for passive income? Can I stop detailing once I've gotten down to no passive income? My ordinary income was $30K so is it as simple as filing only for that?

Michael Plaks · Answer

@Scott R.

You need to file, for several reasons:

- if the income is also reported to the IRS, they will be looking for it on your tax return, because they would not know anything about your expenses/losses until you report it

- your losses will offset your regular income in 2020

- your losses will likely offset your regular income in other years

- your losses will be needed to offset your gains when you sell

And your $110k and $120k numbers may be off for tax purposes, so I'd suggest professional help.

Tom Degroodt · Answer

I mentioned to a mentor one time that I didn't want to pay some professional services, so I was not going to look for them.  His comment was if a lawyer or accountant's fee of $500.00 seems high wait until you see the bill you will get from not having them on your team.  His point was a $500.00 bill from the accountant is much cheaper than paying for a huge mistake.  If you make a huge mistake you will pay that "Education tax" as well as possibly an Accountant fee to untangle the mess.

Joe Splitrock · Answer

How is possible for your properties to lose $120K in expenses? Most large expenses are depreciated, so they are claimed over a period of years. Also keep in mind the loss may be able to reduce other taxable income. It could even result in a big refund check. In other cases you just carry forward the loss so in more profitable years you don't pay as much taxes.

Ultimately it is not your choice. Others said you "should" file taxes, but the IRS actually says you must claim the income.

Can you provide a little more explanation of the expenses, because something seems off here and we may be able to help you.

Bill Exeter · Answer

Yes, you NEED to do it.  It is required, and the IRS will still tax you on depreciation recapture in the future if/when you sell and cash out even if you did not deduct the depreciation.  Passive activity losses are generally carried forward and will offset future taxable items.  You need to get a good CPA with a solid real estate background.

Darius Ogloza · Answer

Not reporting income you receive is about the worst mistake you can make from a tax perspective.  Reasonable people can argue about deductions, credits and such things but income is income is income.  If audited, you start way behind the eight ball on your claim that all of it was offset by expenses.

Joe Splitrock · Answer

@Scott R. I looked at your profile and some of your recent posts mention inheriting property and then transferring into an LLC, while holding the mortgages in your fathers name. I am concerned as @Eamonn McElroy mentions that you are considering the full mortgage payment as an expense. I would strongly encourage you to talk to a tax professional. Depending on the timing of the inheritance, you may have his taxes and your taxes to file. You also want to make sure you have properly established basis for the properties. Mistakes now could result in a major tax bill from the IRS later.

Eamonn McElroy · Answer

The IRS doesn't know what your expenses are.

If you get a 1099 for the gross revenue, and don't report it, you're going to get a love letter from the IRS (CP2000 matching notice to be exact).

Keep in mind taxable income is not the same as cash flow.  If you're including principal repayment of a loan as a deductible expense, that might be why your "expenses" appear abnormally large at first glance.

Jonathan R McLaughlin · Answer

@Scott R. Um...you can do anything you want...but this is a bad idea......NOT a CPA but losses can be valuable for a lot of reasons, as they carry forward and can usually offset tax consequences of gain from a sale.

Brent Coombs · Answer

@Scott R., if your "normal" income is relatively low, why are you even persisting with negative cash flow property?  Seems to me like the reason you're in negative territory is because you "own" a lucrative property that has shown good capital gains, right?

Time to cash it in?

I'm not an Accountant, but my instinct tells me that a good time to sell investment property is when your other income hasn't already attracted a hefty tax bill.

And, there's a lot of talk on BP that now could be a good time to sell anyway.

But to answer your question, as others have said: Yes, declare all income and tax deductible expenses, using professional help.  Good luck...

Scott R. · Answer

Ok thanks!

Passive income negative, do I even bother rental income taxes?

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