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Merlo
Merlo, Accountant
Category: Tax
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Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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I am confused about rental income and what I can deduct. I

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I am confused about rental income and what I can deduct. I am getting married and we each have a condo, I am selling my condo, and we plan on keeping her condo and renting it. We will buy a larger place. I make about $130,000 and she makes around $70,000. It appears that there is an income on rental deductions. Can we file separate to get around this? Does this apply to all rental deductions, or just depreciation? What alternatives do we have?
Paul
Hello Paul,

When you own rental property, you may deduct all of your expenses such as repairs, maintenance, mortgage interest, property insurance, property taxes and depreciation. If you end up with a loss, if you actively participate in the management of your rental property, you may deduct up to a maximum of $25,000 in losses in any one year against your other income.

However, there are income limitations which apply, and these limitations apply to your total loss, not just the depreciation losses.

The maximum allowance is:
$25,000 for single individuals and married individuals filing a joint return for the tax year,

$12,500 for married individuals who file separate returns for the tax year and lived apart from their spouses at all times during the tax year, and

If your modified adjusted gross income (MAGI) is $100,000 or less ($50,000 or less if married filing separately), you can deduct your loss up to the amount specified above. If your MAGI is more than $100,000 (more than $50,000 if married filing separately), your special allowance is limited to 50% of the difference between $150,000 ($75,000 if married filing separately) and your MAGI.

In your particular case, since your combined income is $200,000, you would not qualify to claim any excess losses. The only losses you can claim are up to the amount of your rental income. Excess losses are not deductible.

The deductions can be split by filing separate returns, but the rental loss only applies in situations where you have lived apart for the entire year.

Under the circumstances, you would not be able to claim any excess losses over the amount of rental income you received.

If this was helpful please press the Accept button. Positive feedback is also appreciated.

Thank you Paul.





Customer: replied 7 years ago.
You said; In your particular case, since your combined income is $200,000, you would not qualify to claim any excess losses. The only losses you can claim are up to the amount of your rental income. Excess losses are not deductible.

So I will be able to deduct the interest on the mortage and other expenses etc. up to the point where it totals the rental income?
Hello again Paul,

Yes, you may still deduct all of your losses, regardless of your income level. But if you end up with a loss that is more than your rental income, you cannot deduct the excess loss.

If you and your wife were in a lower income bracket of $100,000 or less for the year, then you could deduct net losses up to a total of $25,000 per year. But the fact that your income exceeds the limit does not disqualify you from at least deducting the losses up to the extent of your rental income.

So if you had rental income for the year of $12,000 and you had total expenses of $14,000, you could not deduct the excess loss of $2,000, but you also would not pay tax on any of the $12,000 rental income, because you have enough losses to offset that.

The income limitations only apply to excess losses over and above your rental income.

If this was helpful please press the Accept button. Positive feedback is also appreciated.

Thank you Paul.

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