what to do with rental income losses, if agi is above the #150k threshold limit?
The only way around the limitation is if the business can be considered ‘active income’ as opposed to passive.
This usually means meeting the criteria to be considered a real estate professional: spend more than 50% of your time in the real estate business AND more than 750 hours per year. And since each rental property is considered a separate business, this means more than 750 hours per rental property. Since you have only 4 rentals and apparently a full-time job, you probably don’t qualify (unless you happen to be a realtor, etc).
Please note that the loss is not…uhm…“lost.” It will be released when you have passive income to offset it in future years, if your income falls below the threshold, or when you sell the property.
You can choose to make a tax election that aggregates all your rentals into one “business”, so you only have to meet the 750 hours test on all of your properties together. If you have a shot at being a real estate “professional”, you would want to make this election.
Having a full-time job will make it nearly impossibly to convince an IRS agent that you’re spending more than 50% of your time on your RE business. Very careful time records have to be maintained.
beware grouping activities for the purpose of meeting the 750 hours test.
any previously suspended losses will not be released until the last property of the group is sold.
if you sell and add properties, and continue to group them together to meet the 750 hours annual test, your suspended losses will never be released.
Mark, forgive my lack of knowledge, what are suspended loses?
I thought I knew the basics of accounting fairly well (I ran a division of a publicly traded company), but suspended loses went right over my head
If my properties are making money even when you figure in depreciation, is the designation something that would make a difference for me?
your original post said you had losses. Rental income & loss is passive, even if you materially participate.
Generally, passive losses can only be deducted from passive income. If you have no passive income, then you cannot deduct passive losses. These non-deducted losses are “suspended,” in that they are carried forward year to year until they can be deducted. More about when they are deducted later.
However, IRS allows you to deduct up to $25,000 of rental losses per year, even though they are passive. Rental losses are treated differently in this regard.
But (there’s always a but) if your income is over certain limits, the $25k deduction goes away. Then real estate losses are suspended until one of three things happens to allow you to take them: 1) your income drops below the threshold, 2) you have passive income to offset or 3) you dispose of the property.
Now, if you spend more than 50% of your time AND 750 hours per year on real estate activities, then you can qualify as a real estate professional and your real estate losses are not limited by the $25k OR income limits. But (there it is again) the 750 hours would apply to EACH PROPERTY.
You are allowed to combine all of your rental activity for purposes of meeting the 750 hour test, but once you have combined the properties in this way you will not be able to deduct any previously suspended losses until the last of the combined properties is disposed of (the entire combined activity is disposed). The real estate professional designation is figured from year to year and (this is the important part) would have no effect on any suspended losses from prior years; they would remain suspended until one of the three previously identified events occurs.
So you can see the problem this would create for a small investor who combines properties to take advantage of the unlimited rental passive deduction, but sells and buys properties and never disposes of the entire combined activity: any suspended losses from prior years would never be released.
Even if you’re making money today, you need to be educated so you can plan, anticipate problems, and know what to do when one happens.
more educational tips, and on topics other than real estate, at my facebook page.