If you actively manage the property and your adjusted gross income does not exceed $100,000, the rental loss (up to a maximum of $25,000) could be deducted from other income such as salary, interest, and dividends. Multiply the rental loss by your federal income tax rate (in our example, 31%). The federal tax avoided as a result of this deductible rental loss is $1,114.
is this true?? if i have a proterty with negative cash flow, i can deduct it from my regular W2? ( even you appriciation is going up and your money is going into equity?)
I know that you can deduct up to $3000 in losses in with stocks, but $25,000 with real estate?? thats a wow.
Well Denny,
You cannot deduct losess from your W2 exactly…
Using a Form 1040 SCHEDULE E, you must claim Supplimental Income and Losses. This includes rents and royalties received and expenses incurred for receiving these rents or royalties. In your case, the expenses are probably more than the rents received and thus the form would have a lowering effect on your income. (lowing your AGI) You can see the form at the IRS’s website: http://www.irs.gov/app/vita/content/military/lesson04/images/1040schedepg1.pdf
Schedule E, if I’m not mistaken, would NOT be used in the cases where it is a business loss. If it is a business loss, you must use a Form 1040 SCHEDULE C.
I’m no tax expert so please make sure you check with your tax professional before following my advice too carefully
Your general understanding is correct. The IRS allows you to use up to $25K in net passive losses to offset your other ordinary income. This net passive loss allowance is available to rental property owners who actively participate in their rental operations.
Note that I said UP TO. Only the actual amount of your net passive loss can be used as a passive loss allowance and that allowance is capped at $25K. If you have more net passive losses than you are allowed to use, then you suspend the unused losses and carry them forward to next year. If your other income is more than $100K and less than $150K, the passive loss allowance is reduced by $1 for each $2 of income over $100K. After $150K, the passive loss allowance is not available to you and all your net passive loss is suspended and carried forward.
Let me also clarify one point. Your question focused on “negative cash flow”. While I have already answered this question, you will need to evaluate your investment criteria to ask why you are keeping a negative cash flow property and not selling it.
It is possible for a rental property investor to have a positive cash flow and still have a net passive loss for tax purposes. The reason lies in that “phantom” expense called depreciation. Depreciation is a “phantom” expense because it reduces your taxable income from rental operations, but does not take any money out of your pocket. Depreciation expenses are also taken against your rental income, and, after all the other expenses of rental operation, could give you a net loss on paper. It is this net loss that is used when you take the passive loss allowance.
If you really have a negative cash flow, then you need a really compelling reason to hold the property.
