Income and depreciation

General Real Estate Investing
1

I’m looking to start investing in rental property. I currently make over $100K a year and have read that it can impact my ability to write off depreciation. Can anyone enlighten me on how this works, and whether there is a way around it?

Thanks!
-Jason

2

depreciation itself is not the issue.

depreciation is but one part of calculating a rental income or loss, along with all the other ordinary expenses of rental properties: insurance, taxes, repairs, etc.

however, over $100k of AGI, rental losses are limited (and eliminated over $150k). This means that if your property has a loss, (rent income minus all expenses including depreciation) the loss you get to claim on your 1040 will be reduced if your income is over $100k.

Even if your income is below $100k, losses are limited to $25k per year (unless you’re a real estate professional).

The loss isn’t lost, however, it just carries forward until your income falls below 100k, or you sell the property. At that time any suspended losses are taken in full. Keep good records so you don’t “lose your loss.”

A lost loss is the last loss you want to lose.

3

It’s adjusted gross income? I read that it was gross. That changes quite a bit for my situation. I should be ok for the time being then. Is there someone that can confirm this?

Thanks,
-Jason

4

Having just completed my taxes less than a month ago and run head long into this limitation I can confirm that AGI is the appropriate measure not gross. Check out the IRS rules at irs.gov if you are uncertain.

5

Actually, AGI is only the starting point. It is the Modified Adjusted Gross Income (MAGI) that is used to determine the limitation on the net passive loss allowance.

MAGI for Form 8582, line 7, is AGI without:

  • Any passive loss or passive income, or

  • Any rental losses (whether or not allowed by IRC § 469(c)(7)), or

  • IRA, taxable social security or

  • One-half of self-employment tax (IRC § 469(i)(3)(E)) or

  • Exclusion under § 137 for adoption expenses or

  • Student loan interest.

  • Exclusion for income from US savings bonds (to pay higher education tuition and fees)

  • Qualified tuition expenses (tax years 2002 and later)

  • Tuition and fees deduction

  • Any overall loss from a PTP (publicly traded partnership)