Depreciation on multifamly

[John Brees]

Our CPA is telling us we can't depreciate our two multifamily properties (purchased both this year) because our household income (married-filing jointly) exceeds $165,000.  I'm hopeful a CPA on here or more experience investor can validate this or share experiences.  I have read several articles and do not view it that way, help is welcome!  Thanks!

[Brandon Hall]

@John Brees what your CPA means to say is that your income has phased you out of being able to claim passive losses generated by your real estate activities. You will still take 100% of the depreciation deduction allowable on your rentals, but if that deduction causes you to have a passive loss, that loss will become suspended and not currently utilized due to your income level.

@Jeffrey Levy the $100k/$150k is called the Passive Activity Loss limitations. If your MAGI is below $100k, you are allowed to take up to a $25k passive loss. If you’re MAGI is over $100k, you are phased out of the $25k loss allowance. When your MAGI exceeds $150k, you can no longer take any passive loss.

To get around the PAL rules, you can qualify as a real estate professional and materially participate in your rentals. At that point you can take passive losses in an unlimited amount regardless of your income.

It’s critically important to use the correct terminology when discussing this information. If any CPA tells you that you cannot take depreciation, seriously consider finding someone else to work with. You’re investing a lot of money and you need to ensure it’s well taken care of.

Depreciation is never limited or eliminated. Your passive loss, however, can be.

For example:

Let’s say my MAGI is $160k, I have gross rental income of $10k, expenses related to my rental of $6k and depreciation of $5k.

My net operating income is $4k ($10k - $6k). But my net TAXABLE income is -$1k ($4k operating income - $5k depreciation).

Because my net taxable income from my rental is negative, I have a passive loss. Because my MAGI is above $150k, I cannot take my passive loss and it instead becomes suspended and carried forward.

And thanks @Brian Adams!