First, let me explain the difference from a tax
standpoint of a C Corporation and an S Corporation. With a C Corporation, you are taxed at both the corporate level and then again at the shareholder
level. If you had a C Corporation which had profits, those profits would be taxed at corporate rates
. Once those profits were then distributed to the shareholders, the shareholders would again be taxed on those profits based on their individual
With an S Corporation, there is no tax at the corporate level. All of the income flows through to the shareholders either in the form of wages or dividends
, and then the shareholders pay taxes based on their individual tax brackets.
If the rental unit that you own is the only source of income for your corporation, then since you had a loss for the year, you would not be taxed at the corporate level since there was no profit for the year to tax.
The rental of real estate property is generally considered to be a passive activity. A loss from a passive activity is only allowed up to the extent of passive income
. There are exceptions to this rule:
If you are considered to be a real estate professional under IRS
definition, then your activity is not considered to be passive, and all of your losses are deductible in the year they occurred. In order to meet the definition of real estate professional, you must devote 50% or more of your time to your real estate activities and your must devote a minimum of 750 hours per year.
You may also qualify to deduct up to a maximum of $25,000 each year from rental losses if you actively participate in your rental activities and if your modified adjusted gross income is less than $150,000. In order to be considered as actively participating, you must actually take part in the decision making of how to manage your property. It does not mean that you have to physically take part in renting the unit or maintaining the unit, but you do have to take an active role in decisions regarding management of the property. If you meet the active participation rule, then you may deduct up to a maximum of $25,000 in losses in any one tax year. If your MAGI is $100,000 or less, then the entire $25,000 is allowed. If your MAGI is between $100,000 and $150,000, then your allowable deduction
is reduced by $1.00 for every $2.00 your MAGI exceeds the $100,000 threshold. Once your MAGI reaches $150,000, the deduction is phased out entirely. Any losses which you have in excess of the $25,000 which you were not able to use, are then carried forward for use on future tax returns
Since you indicated that your MAGI is over $150,000, then even if you actively participate in the management of this property, you would not be allowed to deduct any of your losses from this rental activity. You would, however, be able to carry those losses forward and use them on your future tax returns.
If you meet the definition of a real estate professional, then all of your losses would be allowed in the year they are incurred.
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