How to account for the Loss on rental property

Last I looked, you may take up to $25,000 against ordinary income, phased out as your (MFJ) income ranges from $100K to $150K. So I trust you are up there. If not you need to review the rules regarding this matter. If you may not take that loss for 2007, it carries forward until you can use it (due to decreasing costs/ rising rents) or until you sell the property. These losses can not be lost to you. BTW - it's a rental, forget the $500K exclusion, that's for the home you live in. (I won't go into the intricacies of converting from one use to another, too convoluted, and not your question.)

JOE

Form 8582.

If you are a real estate professional (meaning you work around 15 hours a week or more on your property and a few other conditions), you can deduct your loss in full.

6825,00.html If you're an active participant (meaning you may delegate responsibilities to others but sitll make the management decisions, approve tenants, etc) then you can deduct up to 25k, but it is phased out at 150k. Same for single and married, rather strange.

If you're a passive investor, you can deduct any loss.

Any loss you can't deduct gets carried over until you can use it or until you sell the property.

You only get the 500k exclusion if you lived in the house for 2 of the last 5 years. So if you lived there for 2 years, then rented it for 3 years, you're set. Assuming your gains on the property are 600k, and your disallowed loss over the 3 years is 50k, then your capital gain on the house is 600k-500k0k, and gain from Schedule E on line 17 is negative 50k. So yes, it does offset, but the capital gain is taxed at 15% (or 0% if your AGI is low enough) and the loss lowers your ordinary income so if you were in the 33% tax bracket you would be saving 0.33*50k, and maybe your tax bracket would drop even.

And you work no *more* than 15 hours week at any *other* job that is not real-estate related, and you materially participated. Not all states conform to this rule.

Working 15+ hours/week "on your property" would bother the tenants, wouldn't it?

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Don't forgot the up-to-25% gains tax on the unrecaptured sec. 1250 gain from depreciation allowed or allowable.

-Mark Bole

Along the same subject line and relating to the sec 1250 gain.

Scenario: There was not active participation and the renter is not a real estate professional so the $7K loss is not allowed. Of the $7K loss, $6K was depreciation. The following year the home is sold. Technically the $6K would have to be recaptured as income. How can you use the disallowed loss to offset the income? Seems tough to have to include depreciation as income when it never was used (disallowed) to reduce the income in the first place??

========================================= MODERATOR'S COMMENT: Please trim away all extra text not needed in your reply.

Yeah, I totally forgot about depreciation.

Schedule E will have a loss of 7k, allowed because you are disposing of the property, so it is transferred to Line 17 if 1040. Line 13 will be the capital gain which includes profit on the house minus the allowable exclusion, plus the depreciation of 6k. So these are balancing each other out: -7k (say you are in 25% tax bracket that reduces your tax by 1.75k), 25% capital gains on 6k (increasing your tax by 1.5k).

What if you sell the house at a loss? There is no loss for personal residence, so I guess you still have a capital gain of 6k*0.25. But if you didn't live in the house for 2 of the last 5 years, then you could take a capital loss on the house. So the question is: if you did live in the house 2 of the last 5 years, do you have to treat it as a personal residence (because treating it as business property is favorable if you are selling at a loss)?