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Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 4021
Experience:  Extensive Experience with Tax, Financial & Estate Issues
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Hi, I am about to put my property up for rent and wanted to

Resolved Question:

Hi, I am about to put my property up for rent and wanted to clarify the tax implications.

I've read that in most circumstances rental expenses are income-tax deductible. If my rental income for the year is 20K but expense is 30K, so a loss of 10K, would I get 30K deduction on my taxable income or would it be 10K?

Also in the case of high income (>150K) what would be the implication of passive activity loss rules limting my ability to deduct losses from my income? What if my AGI is between 100 and 150K?

Also, where does rental property depreciation deduction fit into these deductions?


Thanks
ConFused new LandLord
Submitted: 1 year ago.
Category: Tax
Expert:  Stephen G. replied 1 year ago.

Stephen G :

Hi & thanks for using our service. I'll do my best to give you a complete & accurate answer. Please ask me to clarify anything that is not clear.

Stephen G :

Depreciation is one of your rental expenses; basically you have to allocate your tax cost of the property (original purchase price) between land & building. Land is not depreciable. Once you have the allocated cost of the home, you would add any improvements and that will come up with the total cost to be depreciated.

Stephen G :

You depreciate it over 27 1/2 years for residential rental property.

Stephen G :

All of the other expenses related to the property would also go into your rental expenses listed on a Schedule E which is attached to your tax return.

Stephen G :

Your rental income also goes on that form and you come up with a net profit or loss.

Stephen G :

As far as the ability to deduct any loss against your other income, as you pointed out, that depends upon how much other income you have.

Stephen G :

If your AGI (without the rental activity) is over 150K, no current deduction is allowed and the loss must be carried forward until your income qualifies or you disposed of the property.

Stephen G :

If your income is between 125k to 150K then any rental loss is pro-rated where at 125K you can deduct up to 25K and at 150K you don't get any current deduction as explained above.

Customer:

Are there restrictions on how many years can the losses be carried forward? and when I sell the property will that be deducted from the sale profit/loss?

Stephen G :

Correction the 125K figure above should be 100K as you have listed in your question.

Customer:

Is that the same for single filer and filing jointly?

Stephen G :

No restrictions on the suspended losses; yes you will be able to deduct the suspended losses against your income in the year when you sell the property.

Stephen G :

Do you mean Married filing separately?

Customer:

I mean married-filing-jointly. In that case does the deduction still phase out at 100k/150k

Stephen G :

Yes

Customer:

ok, so it looks like there is no way to shelter rental-losses if AGI is high. Am I missing anything that would help me save on tax?

Stephen G :

Well is this currently your personal residence & if so, how long have you owned it & is it worth a lot more than you paid for it now?

Stephen G :

Are you married?

Customer:

Yes it is current residence. Owned for 6yrs, Its worth a lot less than I paid for. Married: yes

Stephen G :

Hold on a minute, I need to check something

Stephen G :

One thing that comes up a lot now & apparently will apply to you is in order to determine the tax basis of the property when your residence is converted to rental, it is the LESSER of the fair market value of the property on the date you make the conversion or your original cost plus improvements.

Stephen G :

So when you say it is worth a lot less than you paid for it, the FMV is what is used to allocate between land & building (usually based upon the real estate tax bill), and thus the "loss" is not able to be used.

Customer:

ok

Stephen G :

Questions?

Stephen G :

If you need to contact me again with any tax or financial questions, you can just ask for "Steve G" at the beginning of your question. Again, please remember to rate my response. Bonuses, where you think they are warranted, and excellent ratings, are always most appreciated. Thanks again for using JustAnswer.com.

Customer:

ok thanks

Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 4021
Experience: Extensive Experience with Tax, Financial & Estate Issues
Stephen G. and 3 other Tax Specialists are ready to help you

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