Tax Deduction on income loss on rental property. Passive income? (Howe: sale, real estate)

[homebuyer1786]

Guys,

Need your advise. I own a house in MN, which I gave on rent for 7 months last year. I live in TX.
Now, I was filling my taxes through Turbotax. Following are considered a contributing factor to any expenses on my house (which should be deductible):

- Property tax for 7 months when house was on rent.
- Mortgage interest for 7 months when house was on rent.
- Mortgage insurance for 7 months when house was on rent.
- Maintenance and mgmt. cost for 7 months when house was on rent.
- Depreciation of house for 7 months when house was on rent.

Considering above factors, I had a loss of $9000 (approx) in 2014. However, Turbotax is saying that I can not claim deduction on these losses because my house rental income is passive income.

This is disturbing to me as I am straight out loosing on deductions for property taxes and mortgage insurance I paid over 7 months.

I have not tried using H & R Block software online. May be that will be better.

I am not sure if I am doing something wrong. Please advise.

[huma281]

Passive losses can only be used to offset passive income. Your ability to deduct is limited. One exception is if you're a real estate professional.

[Mandres]

You'd think it would be much easier to google "passive income/loss" than to post about it on City Data ...

http://www.irs.gov/Businesses/Small-...-Rental-Losses

[Htown2013]

So you can deduct passive income losses on a rental property if your spouse is a licensed real estate agent?

[chris_ut]

Passive losses on income property used to be a huge tax shelter that the IRS shut down as part of tax reform in the 80s.

[baggiegenes]

I owned a rental house for several years. It is correct that you can only deduct passive losses against passive income. But, the excess amount that cannot be deducted this year is carried forward every year until you either have positive rental income or sell the house. Including depreciation, I had a paper loss on my rent house for several years that just added up and carried forward. The year I sold the house it all became deductible against earned income and I ended up with a large refund.

[bghouston]

Originally Posted by homebuyer1786

Guys,

Need your advise. I own a house in MN, which I gave on rent for 7 months last year. I live in TX.
Now, I was filling my taxes through Turbotax. Following are considered a contributing factor to any expenses on my house (which should be deductible):

- Property tax for 7 months when house was on rent.
- Mortgage interest for 7 months when house was on rent.
- Mortgage insurance for 7 months when house was on rent.
- Maintenance and mgmt. cost for 7 months when house was on rent.
- Depreciation of house for 7 months when house was on rent.

Considering above factors, I had a loss of $9000 (approx) in 2014. However, Turbotax is saying that I can not claim deduction on these losses because my house rental income is passive income.

This is disturbing to me as I am straight out loosing on deductions for property taxes and mortgage insurance I paid over 7 months.

I have not tried using H & R Block software online. May be that will be better.

I am not sure if I am doing something wrong. Please advise.

I am an individual tax return expert and have been doing this for more than 10 years. I can confirm that you will not get any deduction for this passive loss in the current year.

Also you CANNOT take depreciation for a property that is being rented less than 12 months in total. So I am assuming that you started renting in June last year and continuing to rent this year as well. If not, ensure the software is not calculating depreciation.

You cannot offset passive losses against income from non-passive activities (i.e. active income such as wage/business income & portfolio income such as interest/dividends etc.). You can only offset it against income from another passive activity (ex. another rental property or income from a partnership). In a future year, if you have a gain, you can offset that gain with the carryforward loss and reflect only the net gain or carry forward the remaining loss in case all gain is being offset.

You will need to ensure that Form 8582 is being filed along with the return to track the losses that are accumulating every year and ensure that in the year of sale IRS allows you to offset all losses against nonpassive income.

Hope this helps.

[homebuyer1786]

Thank you bghouston! Your help is much appreciated.

[astrohip]

Originally Posted by Htown2013

So you can deduct passive income losses on a rental property if your spouse is a licensed real estate agent?

I haven't seen this answered unless I missed it... being a real estate agent is not enough. You have to make your living from the activity in question for it to become active vs passive. Being an agent is not making a living from rental properties.

[homebuyer1786]

You have to spend more 750 hrs managing property and more than 50% of work related time on it. It is only after this you qualify for deduction on losses.