Recent Feedback
My wife and I are Canadian residents. In April 2011 we purchased as joint tenants a condo in Hawaii, which was renovated and effective July 01 offered for rent, however rented out only on September 01. At the end of this first year it produced a loss of $24000 due to the purchasing and renovation and empty months costs.When working on my 1040NR return I just discovered that two married non-resident aliens can not file a joint tax return. I wonder, how separate returns can be filed, when the only income (and for the foreseeable future only losses) are produced from this one unit. Do we have to split the purchase price, all income and all losses and the depreciation down the middle for this separate filing or are there any other easier options?Thank you Klaus
Optional Information: State/Country relating to question: United States
Hi and welcome to Just Answer!
As Canadians - you may file a joint US nonresident tax return - on form 1040NR - http://www.irs.gov/pub/irs-pdf/f1040nr.pdf
you will check the box 3 for your filing status - "Married resident of Canada or Mexico or married U.S. national" and will provide your spouse identification just below.
There is no need to file separate tax return even if you own property jointly and jointly receive rental income.
I think that would be the best way to report your rental activity.
If for any reason you need to file separate tax returns and report separately yours and your spouse's parts of income and expenses - you will simply divide all income and expense items according to agreement - in your case it would be evenly.
However - based on your circumstances - that would be unnecessary.
Let me know if you need any help.
I shouldc have mentioned that I had checked box 3 and also 7b, however I was not sure. It obviously is basedon the Canada-US tax treaty.That means I also can claim 2 exemptions at $3700 each on line 40.If that is correct then I will exceed the $25000, but that is, I believe my maximum I can claim.And lastly is this loss automativcally carried over by the IRS or do I have to complete another form for carrying it forward?
That is correct - you will claim two exemptions - for you and for your spouse.
Also - rental activity is treated as a passive activity - and passive activity loss limitation will apply.
All disallowed losses will be carried over to following years and will be used against passive income.
Specifically for residential rental activities - taxpayers are allowed to deduct up to $25,000 in losses - but only if they materially participate in that activity.
Because you are living far away - I guess that you might not materially participate and may not use passive loss.
That is something you need to verify.
Use Form 8582 , Passive Activity Loss Limitations, to summarize income and losses from passive activities and to compute the deductible losses.
Guidelines for determining material participation can be found in Publication 925, Passive Activity and At-Risk Rules.
Under the IRS guidelines we ARE actively participating in the operation and rental of this unit. Previous literature let me believe that I do not need to complete Form 8582, but it seems this is the only way, how I can carry forward my loss.
For the above reason I am not familiar yet with 8582 but do not want to keep this communication any longer open> So please answer these last questions:
1) Does form 8582 with the worksheets give room to use part of the 7400 exemption amount to get me to the maximum $25000 (As mentioned before I carry at the moment a loss of $24000)?
2) And again since I did not study this form yet: Is that also the one, where I can enter the depreciation of the condo, or is form 4562 the only form, which I have to submit with my 1040NR, though I will not need to use any depreciation amount for probably a few years? Somewhere I read that I have to start calculating the deprecation right away, even, if I don’t use it.
Thank you
Sorry I just noticed that links above were posted incorrectly
- www.irs.gov/pub/irs-pdf/p925.pdf
- www.irs.gov/pub/irs-pdf/f8582.pdf
If you or your spouse actively participated in a passive rental real estate activity, you can deduct up to $25,000 of loss from the activity from your nonpassive income.
Active participation is not the same as material participation. Active participation is a less stringent standard than material participation. For example, you may be treated as actively participating if you make management decisions in a significant and bona fide sense. Management decisions that count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions.
You may only carryover to following year disallowed passive losses.
If you actively participating in the operation and rental of this unit - you are allowed to deduct up to $25,000 in losses and the form 8582 will not allow you to carry forward losses.
Form 8582 has no connection with $7400 personal exemption. It is only use to determine allowed passive losses and the amount to carryover. That is not related to your other possible income or deductions.
2) And again since I did not study this form yet: Is that also the one, where I can enter the depreciation of the condo, or is form 4562 the only form, which I have to submit with my 1040NR, though I will not need to use any depreciation amount for probably a few years?
Depreciation is an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property. It is an annual allowance for the wear and tear, deterioration, or obsolescence of the property.
Depreciation begins when a taxpayer places property in service for use in a trade or business or for the production of income. The property ceases to be depreciable when the taxpayer has fully recovered the property's cost or other basis or when the taxpayer retires it from service, whichever happens first.
You do not have to deduct depreciation. But choosing not to deduct will not provide you any tax benefits neither now nor later.
Additional information about depreciation are in Publication 946, How to Depreciate Property - www.irs.gov/pub/irs-pdf/p946.pdf
In additional...
If your deductions for the year are more than your income for the year, you may have a net operating loss (NOL). An NOL year is the year in which an NOL occurs. You can use an NOL by deducting it from your income in another year or years.
Calculating an NOL can be tricky and you might want to consult with a professional to help ensure you do it correctly, or get the IRS Publication 536, Net Operating Losses - www.irs.gov/pub/irs-pdf/p536.pdf
Now you confused me a bit. Since we are actively participating (we put the rental ad online, we prescreen and we approve renters after consultation with our agent and also approve repairs etc) we can carry over the $25000, however the way I read this now I do not need to complete form 8582, because it does not allow me to carry forward losses. So which form is required to carry forward these $24000?
Further the Internal Revenue Service allows depreciation as an expense against taxable net income, and that will be included in the NOL, right? And that would be calculated on Form 1045 Schedule A.
Only income-producing real estate properties may be depreciated. So the annual depreciation amount of $8000 (Here in Canada we call it CCA, and I have done it for my Canadian return and partially used it, since Revenue Canada limits my other expenses much more than the IRS) will be mentioned on line 21 of 1040NR.
Now my losses exceed the $ 25000 by far. Line 39 on the 1040NR shows now $32000.
I understand that I do not loose the depreciation amount, but on the other hand my deductions are limited to $25000. How do I carry this forward, i.e. which form do I need to attach to 1040NR?
Which forms are required to be attached to 1040NR? Is it Form 1045 Schedule A?
So which form is required to carry forward these $24000?
If you actively participating in the operation and rental of this unit - you are allowed to deduct up to $25,000 in losses and you may not carry forward these $24000 rental losses.
The depreciation of rental property is deducted against your rental income - not against your taxable income and not included directly into NOL.
You calculate your depreciation on form 4562 - www.irs.gov/pub/irs-pdf/f4562.pdf
and deducted on schedule E line 18 - www.irs.gov/pub/irs-pdf/f1040se.pdf
Losses above $25,000 are disallowed - and will be carried over to following year.
You will calculate allowable and disallowed losses on form 8582 - http://www.irs.gov/pub/irs-pdf/f8582.pdf - see part II
If you have .NOL - that is treated separately. Because you just started your activity - no need to carry back the NOL - and you do not need to use form 1045.
Now it seems we are going a bit in circles.
You state: If you actively participating in the operation and rental of this unit - you are allowed to deduct up to $25,000 in losses and you may not carry forward these $24000 rental losses.
I cannot see a difference a difference between these two figures. I quote: “The Internal Revenue Service allows you to deduct up to $25,000 of rental property loss as of July 2011; the exact amount of loss you may deduct depends on your adjusted gross income. If you have more losses than you are allowed to deduct, you may carry them forward until you have deducted all losses or sold the property”.
I give you my numbers: My rental income in 2011 was $11000. We had no ordinary income. My expenses (purchasing costs, travel expenses, interest on loans, maintenance, taxes and repair items were $35000, which translates to a loss of $ 24000.
Additionally based on form 4562 on the value of the unit and the 27 ½ year depreciation and putting it in service on July 1, 2011 I can depreciate 50% of the annual depreciation amount $16000, i.e. $8000.
According to my understanding the expenses including the depreciation expenses are all recorded on Schedule E and the $25000 limit is calculated via Form 8582 and then entered on Schedule E, line 22. Line 26 will then show the same amount. Is this correct?
Sorry for obviously not understanding you, but I went through the entire process in Canada, and it appeared very logical, i.e. first rental income, then deduct expenses and then deduct a portion of the depreciated amount against the balance of my remaining rental income, until my tax owing on the rental business was Zero. The remaining loss carries forward to next year.
I am struggling here because of the multiple forms, which need to be used.
I do hope I got it now.
My expenses (purchasing costs, travel expenses, interest on loans, maintenance, taxes and repair items were $35000, which translates to a loss of $ 24000.From your list - purchase costs are not deducted - but added to the basis of the propertyAccording to my understanding the expenses including the depreciation expenses are all recorded on Schedule E and the $25000 limit is calculated via Form 8582 and then entered on Schedule E, line 22. Line 26 will then show the same amount. Is this correct?Yes - that is correct. That amount will go to form 1040NR line 18.That is not simple tax return - so it is understandable that it takes time from you to file all these forms. However when you will do filing one time - it would be easy next year.
So just to make sure: Apart from entering the $ 25000 on line 18 of 1040NR there is no other form to be completed, apart from 8582 and Schedule E?Thank you
That is correct.For next year - there will be two additional issues: -- form 8582 - passive losses carried over -- NOL will be reported on 1040NR line 21.
Experience: Taxes, Immigration, Labor Relations