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Stephanie B.
Stephanie B., Enrolled Agent
Category: Tax
Satisfied Customers: 555
Experience:  MTax, EA, QuickBooks Proadvisor. Over 10 years accounting and tax experience specializing in individual and small business.
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can I deduct rental loss if I actively participated in rental

Customer Question

can I deduct rental loss if I actively participated in rental management?
Submitted: 2 years ago.
Category: Tax
Expert:  Tax.appeal.168 replied 2 years ago.
Hello, THANK YOU for choosing Just Answer. My goal is to help make your life...a little...LESS taxing.

Q: can I deduct rental loss if I actively participated in rental management?

A: In brief, if either of the following apply to you, the answer is no, you cannot deduct the rental loss. SEE BELOW:

Rentals generally are passive activities and are subject to the passive loss disallowance rules. See IRC § 469(c)(2). A loss from a passive activity is not currently deductible unless one of the following applies:

Passive income exists (losses are allowed to the extent of passive income);

The taxpayer actively participates in a rental real estate activity and qualifies for the $25,000 special allowance;

There is a qualifying disposition under IRC § 469(g); or,

The taxpayer meets the requirements of IRC § 469(c)(7) for real estate professionals.

-----------------------------------

REFERENCE SOURCE:

http://www.irs.gov/businesses/small/article/0,,id=146326,00.html

Please let me know if I can be of further assistance to you regarding this matter.

Thank you again for using JUST ANSWER.

Expert:  Tax.appeal.168 replied 2 years ago.
Hello again,

I apologize, I inadvertently wrote that you could not deduct the loss, where it clearly states that you can.
Customer: replied 2 years ago.
If rental income qualifies as passive income, I had a certain amount of it. Would that qualify me?
If it does, how would I work it in Turbotax?
Expert:  Tax.appeal.168 replied 2 years ago.
Hello again,

Q: If rental income qualifies as passive income, I had a certain amount of it. Would that qualify me?

A: Yes,...Passive income exists. Note that losses are allowed to the extent of passive income.

-----------------------------------------
Q: If it does, how would I work it in Turbotax?

A: I'm not sure what you're asking here. Please advise.
Customer: replied 2 years ago.
I'm using Turbotax to enter all the numbers but it doesn't allow me to deduct the loss of rental income even though it shows a negative number. I've been trying to figure out what I need to do in order to deduct the loss. Could you tell me?
Expert:  Tax.appeal.168 replied 2 years ago.
Hello again,

To claim rental income and losses, you would use the Schedule E. Is this the form that you are using?
Customer: replied 2 years ago.
In Turbotax I enter everything in a questionnaire format and it fills out the appropriate schedules based on what I enter.
Expert:  Tax.appeal.168 replied 2 years ago.
Did you happen to refer to the IRS webpage that I referenced, in the event that you did not, note that you would qualify for a $25,000 special allowance, the $25,000 special allowance has a phaseout point. The MAGI (modified adjusted gross income) must be less than $100,000 in order to obtain the full $25,000 benefit. If you have MAGI over $100,000, the $25,000 rental real estate exception decreases by $0.50 for every dollar over $100,000. It is completely phased out when your modified adjusted gross income reaches $150,000.
Customer: replied 2 years ago.
I understand that but my question is specifically about Turbotax. Are you familiar with it and the questions/options it gives when entering Rentals and Royalties section?
Expert:  Tax.appeal.168 replied 2 years ago.
My familiarity with the TT software is limited, but if you like I can attempt to further assist you, or I can release the question back into the que so that another expert who has more familiarity with the TT program can try to assist you. Let me know how you would like for me to proceed.
Customer: replied 2 years ago.
I guess my question is TT specific but I do appreciate your time and effort.
Expert:  Tax.appeal.168 replied 2 years ago.
I understand, I'm sorry that I am unable to assist you with the TT portion of your question. I will release the question back into the que. As I would think the TT questionnaire is similar to the actual Schedule E, referring to the following page may be beneficial to you.

http://www.taxbrain.com/kb/default.asp?a=27

Thank you again for using JUST ANSWER.
Expert:  ezcpa replied 2 years ago.

Hello, I will try to assist you in applying the passive activity rules the expert provided in Turbo Tax.

 

It sounds like you have already found the step by step interview section for rentals. Sometimes it is tricky to use the interview method because even if something is marked wrong, Turbo Tax won't ask the question again.

 

To check you entries, use the forms method. From the top right select the forms button. Look for the Schedule E worksheet for your rental activity. Make sure the following items are selected:

 

You should have 365 days rented at fair rental value. Box C for active participation should be checked. The other boxes A-H should be blank. Also, double check the AGI limit - make sure your AGI is under $100,000. There are also some limitations if you are filing Married Filing Separately.

 

I hope this answers you question. Please let me know if you need additional information.

Customer: replied 2 years ago.
My AGI is slightly over 100k. Does that disqualify me?
Expert:  Tax.appeal.168 replied 2 years ago.
Hello,

Original expert here, to answer your question, a MAGI of over $100,000 does not disqualify you, however it reduces the $25,000 exception. SEE BELOW:

The MAGI (modified adjusted gross income) must be less than $100,000 in order to obtain the full $25,000 benefit. If you have MAGI over $100,000, the $25,000 rental real estate exception decreases by $0.50 for every dollar over $100,000. It is completely phased out when your modified adjusted gross income reaches $150,000.
Customer: replied 2 years ago.
Hi ezcpa. Thank you for your answer but I cannot find box C on schedule E. What line number is XXXXX under?
I'm married filing separately with AGI $104k
Expert:  Stephanie B. replied 2 years ago.

Another expert here.

 

You say you are married filing separately with an AGI of $104,000. That changes the answer a bit. If you and your spouse have lived together at any time in 2011, the $25,000 allowed loss deduction the previous expert spoke of is reduced to $12,500 for MFS while the AGI limit is reduced to $50,000 from $100,000. So, since your AGI is over $100,000, your special rental loss allowance of $12,500 has phased out completely for 2011.

 

If you and your spouse did not live together at any time in 2011, this MFS reduction to $12,500 does not apply, but instead you revert back to the $25,000 loss limitation.

Turbo Tax should have asked you if you and your spouse lived together at any time in 2011 when you marked you were MFS.

If this answers your question, please click the accept button as this is the only way we get paid for the assistance we provide to you.

If you need more clarification, please let me know. If I am not available at the time, I will be.

I appreciate the opportunity to assist you and I look forward to your response.

Stephanie

 

 

Expert:  ezcpa replied 2 years ago.

The Box C I was referring to is on the Turbo Tax Schedule E Worksheet, not the actual tax form.

 

I see another expert has already responded, and I agree it appears your real issue limiting your passive activity deduction is filing married filling separately.

Customer: replied 2 years ago.
Stephanie, I don't remember being asked the question about living together (we were not) in the initial interview. How do I check for it in TT? Thanks in advance.
Expert:  Stephanie B. replied 2 years ago.
Let me check into that. I will be back in an hour or so.
You are very welcome.
Stephanie
Expert:  Stephanie B. replied 2 years ago.
When I look at TurboTax Deluxe online, if I click Married Filing Separate for a filing status and click continue, it gives me three selections. One is Either my spouse or I claim itemized deductions, My spouse did not live with me at any time between July 1 and December 31 2011, or None of the above. When I click on My spouse didn't live with me at any time between July 1 and December 31, 2011 another box opens that says I lived apart from my spouse for all of 2011. If this is the case, you will need to check that box as well.

This was all under the Personal Information and Filing Status.

Let me know if you need more clarification.

Stephanie
Customer: replied 2 years ago.
Thank you, XXXXX XXXXX have to try it when I get home tonight.
Expert:  Stephanie B. replied 2 years ago.
You are welcome. I'll check in tonight in case you have trouble.
Customer: replied 2 years ago.
Stephanie, it's strange but I don't see any of those questions you mentioned in my TT Premier version:

Either my spouse or I claim itemized deductions, My spouse did not live with me at any time between July 1 and December 31 2011, or None of the above. When I click on My spouse didn't live with me at any time between July 1 and December 31, 2011 another box opens that says I lived apart from my spouse for all of 2011.

Do you think I should get the Deluxe version instead?
Expert:  Stephanie B. replied 2 years ago.
Ok. I have found the filing status on the premier online version. It is under personal information. It says "Were you Married?". I click married. It says do you want to file this return together with your spouse. I say no. Then it asked for the spouse information. After that is says, select any that apply. This is the same as in the Deluxe version. See if you can find that in yours.
Customer: replied 2 years ago.
With your help I have finally found all those marriage questions and made corrections and TT allowed me to claim exception for my wife but it still says I'm not RE professional (when I went back to review the royalties and rental income) and my tax refund remains unchanged. How can this be?
Expert:  Stephanie B. replied 2 years ago.

I am at the same place that you are at in TurboTax Premier. I have put in your estimate income and a loss on rental of $25,000. When I get to the screen that says Your profit or loss results so far, the rental house shows a profit of zero. The "such as what" link says that MFS and living together reduces the losses to zero and MFS but living apart all year limits your losses to $12,500.

 

This is why it isn't giving you any loss and suspending the entire loss. I reviewed my tax guide, and see I misread the limitation. When I told you there was no reduction of the $25,000 if you lived apart all year, I was incorrect. There is no loss allowed at all if you lived together at all in 2011. If you lived apart all year, such as is your case, you are limited to the $12,500. Here is the link to Pub 527 that discusses this issue. I am sorry for the incorrect information earlier. http://www.irs.gov/publications/p527/ch03.html

Keep in mind your losses are not gone completely. They are disallowed and will carry over to future years when you have profit, your AGI reduces below the limits, or you sell the property.

Again, I am sorry for the misinformation on the MFS limitations.

Customer: replied 2 years ago.
So, if I can claim rental losses up to $12,000, how come TT doesn't let me deduct anything?
Expert:  Stephanie B. replied 2 years ago.
Because your AGI is too high. The limitation for the phaseout for MFS starts at $50,000 unlike MFJ that starts at $100,000. Your $12,500 allowed loss is reduced by $.50 for every dollar your AGI is over $50,000. Your $12,500 was totally phased out at $75,000 AGI. If your AGI was between $50,000 and $75,000 you would have been allowed to use some of your loss, but not the full $12,500. Since your AGI is over $75,000, your loss is completely phased out and must all be carried forward.
Stephanie B., Enrolled Agent
Category: Tax
Satisfied Customers: 555
Experience: MTax, EA, QuickBooks Proadvisor. Over 10 years accounting and tax experience specializing in individual and small business.
Stephanie B. and 5 other Tax Specialists are ready to help you
Customer: replied 2 years ago.
Hi. I had some ammortised losses from a rental property in 2010 that I could not deduct last year and I need to carry them over to 2011. How do I do that (what line and schedule would I have to take the amount from and where do I enter it in TT)?
Expert:  Stephanie B. replied 2 years ago.
Are they the disallowed losses from the rentals that are to carry forward to 2011?
Customer: replied 2 years ago.
Yes, that's what I think.
Expert:  Stephanie B. replied 2 years ago.
Ok. I went to Explore on My Own in Wages and Income and clicked on Rentals and Royalties. I went through until I got to Tell Us about the Property. Down at the bottom, there is Carryovers. Three boxes, I have passive activity real estate losses carried over from a prior period, I have at-risk losses carried over from 2010, and None of the above. You need to check these boxes that apply and you will be able to enter your carried over losses.
Customer: replied 2 years ago.
what line and schedule would I have to take the amount from my 2010 return?
Expert:  Stephanie B. replied 2 years ago.

You should have a carryover worksheet in your tax file. Under Passive Activity near the bottom of the sheet will show the carryover loss for each rental property you report on your Schedule E. There are also passive activity worksheets for each property that show the "losses suspended to next year". This would be what you would report on your 2011 as carried over. You should also be able to look at Form 8582 in your 2010 tax return. Line 5 will show the total passive loss, line 10 is the amount of loss taken on your 2010 return, and the net (which isn't calculated on that form) will be what you carry over to the next year.

Customer: replied 2 years ago.
I've found it. Line 5 (Form 8582) is blank but line 4 has a negative amount/loss. Can I carry over the negative amount from line 4 to my 2011 tax return?
Expert:  Stephanie B. replied 2 years ago.
What was on line 1a, 1b, 1c, and 1d of that form 8582?
Customer: replied 2 years ago.
all blank
Expert:  Stephanie B. replied 2 years ago.
So where is the number on line 4 coming from? Are there other numbers in other boxes on the 8582?
Customer: replied 2 years ago.
It came from worksheets 3, 5, and 6 and carried over to lines 3b, 3d, and 4.
Expert:  Stephanie B. replied 2 years ago.
Ok. Lines 3a-3d are other passive activities, not rental real estate activities with active participation. When you completed your 2010 returns, did you mark that you were an active participant in the rental activities? Or did you have passive income from another source? Such as K-1s as a limited partner or something? The section 3 that you have filled out on your 2010 return shows passive losses that will be restricted to passive income without the special real estate loss allowance. Section 1 of Part I of the 8582 is for the rental real estate activities. This is where the income and loss from rentals would generally be reported. Then the $25,000/$12,500 limitation would be taken in Part II.

Section 3 of Part I that you have completed means this is passive activities that do not fall within Sections 1 and 2. The big difference is you can not deduct more losses than the income for this section.

You should review your 2010 return and see if you filed it correctly. Look at the rules for active participation of rental real estate activities, which are different than real estate professional rules. If you filed it incorrectly, I suggest amending the return so the carryovers are correctly handled.
Customer: replied 2 years ago.
1. How do I amend my 2010 return (step by step, please)?

2. Do I need to wait till IRS accepts the change of passive losses to active so that I can carry those losses to the 2011 return?

3. If I change the passive losses to active will I be able to reduce my tax liability or increase the amount of refund?
Expert:  Stephanie B. replied 2 years ago.

1) Here is the link to the Turbo Tax instructions on amending a prior year return. You will have to send a paper return as the IRS does not allow for electronically filed amended returns, yet. http://turbotax.intuit.com/support/iq/Amend-a-Return/How-to-Amend--Correct-or-Update--a-2010-Tax-Return/GEN13226.html

 

2) I would not wait for the IRS to process the changes. I would go ahead and amend my 2010 and then file my 2011 with the correct carry over.

 

3) Probably not, if your situation is the same in 2010 as it was in 2011. However, you want this to be correct because if you do get to the point you are able to deduct your passive rental losses, you don't want to be limited to only the passive income that is received. There would be no additional loss allowed.

Customer: replied 2 years ago.
3) Is it because my AGI was too high (it didn't change from 2010 to 2011) and I was also MFS?Yet, in 2010 I got a refund more than double than what TT is showing for 2011 and I'm trying to figure out what made it so different. Any ideas?
Expert:  Stephanie B. replied 2 years ago.

Possibly. I would review my 2010 and 2011 returns side by side line by line to see where the differences are. It could have something to do with the rentals or nothing at all.

Customer: replied 2 years ago.
Hi. The first thing that jumped at me when comparing 2 returns is that 2011 has a large amount of capital gains on line 7a Schedule D and 2010 has 0. It says that this amount is entered from line 15 (Schedule D) but I don't find that line. Line 13 is the last one, or did I miss something?
Thanks in advance.
Expert:  Stephanie B. replied 2 years ago.
Line 15 is the very last line on page 1 if the Schedule D. Did you sell anything in 2011? Stocks, personal assets, rental property? Do you get a 1099 from an investment company that had capital gains reported? If you have something on line 13 and line 15 of Schedule D, this is probably flowing from an entry from a 1099-DIV from an investment company.
Customer: replied 2 years ago.
I had capital gains distribution in 2011. Does that amount go to line 7a Schedule D?
Expert:  Stephanie B. replied 2 years ago.

For a capital gain distribution, you can report them directly on line 13 of the 1040, and check the box that Schedule D is not required, if both the following apply....1) The only amounts that are to be reported on Schedule D are from the 1099-DIV and 2) None of the 1099-DIVs have an amount in Box 2b, 2c, or 2d. If these are true, you will not have the Form Schedule D, but the capital gain will still apply so it is on Line 13 of your 1040.

Customer: replied 2 years ago.
I did get 1099 DIVs but none have any amounts in Box 2b, 2c, or 2d, only in 2a. Does this mean I don't need to file Schedule D? If so, how do I do it in TT that has already filled out Schedule D?
Expert:  Stephanie B. replied 2 years ago.
Yes, unless you have something else that would be on Schedule D. You have to enter it on line 13 of the 1040. TurboTax should enter it properly on the front page of the 1040 when you answered the questions on the 1099-DIV.
Customer: replied 2 years ago.
Line 13 of 1040 is filled out properly but I cannot say for sure if there's something else on Schedule D that's required. Do you think I should leave Schedule D in just to be on the safe side?
Expert:  Stephanie B. replied 2 years ago.
If Turbo Tax has it in there, it won't hurt anything to leave it in there.
Stephanie B., Enrolled Agent
Category: Tax
Satisfied Customers: 555
Experience: MTax, EA, QuickBooks Proadvisor. Over 10 years accounting and tax experience specializing in individual and small business.
Stephanie B. and 5 other Tax Specialists are ready to help you
Customer: replied 2 years ago.
Hi. Could you help me with amending 2010 return? I didn't use TT for 2010 but sent in a paper copy. Will I need to file 1040X and where do I enter "active participation" in property rental? Thank you.
Expert:  Stephanie B. replied 2 years ago.
You will need to send in a 1040X with any corrected forms/schedules. There isn't a box to mark that says active participation. It is how you treat the losses. Since you are doing it by hand, I wonder if you just completed the wrong sections of the Form 8582.
Customer: replied 2 years ago.
Could you be more specific, please, about the 1040X forms and schedules? What could be wrong about Form 8582?
Expert:  Stephanie B. replied 2 years ago.

When you completed the Form 8582, you said the numbers from your rental activity flowed to lines 3a, 3b, and 3d. They should have flowed to lines 1a, 1b, and 1d. Then they would flow to Part II of the 8582 and then to Part IV.

When you amend a tax return, you complete the return making all the corrections. The 1040X will then show the numbers from the original return in Column A, the numbers from corrected return in Column C, and the net change in Column B. You include the 1040X, the 1040, and any changed schedules/forms such as Form 8582 and Schedule E with the amended return.

In your situation, if you are not able to take any of your loss due to your AGI limitations, your 1040X may not have any changes to the numbers. However, you will have a change to the Form 8582 showing the passive activities losses and carryovers correctly reported on the correct rental activities lines. This will affect how the losses are carried over and when you can deduct them in the future.

Customer: replied 2 years ago.
Hi. Should I enter the amount of refund on 1040x? Since it's asking for the amount "I want to be refunded to me" it might appear that I'm asking for the refund again but I'm not.
Expert:  Stephanie B. replied 2 years ago.

Line 17 on the 1040X asks for the amount of the overpayment on the original return. You enter the refund amount there from your original tax return. If you do not have any additional refund, you leave 20 and 21 blank. If you have an additional refund, you enter that on line 20 and 21.

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Stephanie B.
Stephanie B.
Tax Professional
555 Satisfied Customers
MTax, EA, QuickBooks Proadvisor. Over 10 years accounting and tax experience specializing in individual and small business.