Previous year passive losses offsetted by current year passive income?

Question

Hello my fellow investors!

I had losses on my rentals last year as passive losses (I'm not a professional real estate agent).
I make $150k so cannot use them to offset my capital gains.
This year if I have gains on my rentals (passive income) can I use my former year passive losses to offset this years passive income and therefore not pay taxes on this years rental income?

Example:

$10k losses last year on passive income rentals.   Could not use that to offset taxable income from my full-time job.

$10k profit this year on passive income rentals. Instead of paying taxes on this $10k, can it be offsetted due to last years losses?

Account Closed · Answer

Yes, you can potentially use your previous year's passive losses to offset this year's passive income from your rental properties. The ability to do this is governed by the tax rules surrounding passive activity losses and the concept of carryforward.

Here's how it works:

• Passive Activity Losses: Rental real estate activities are generally considered passive activities for tax purposes, especially if you are not a real estate professional. Passive losses cannot be used to directly offset your ordinary income, such as your full-time job income. In your case, you couldn't use last year's $10,000 passive losses to offset your $150,000 full-time job income.
• Carryforward of Passive Losses: However, if you have passive losses in one year that you couldn't fully utilize, you can typically carry those losses forward to future years. This means you can "bank" those losses to offset future passive income from rental properties.
• Offset Passive Income: In your example, if you have a $10,000 profit from your rental properties this year, you can use the $10,000 passive losses from last year to offset this year's passive income. This would result in no tax liability on the rental income for this year because the losses from last year are reducing your taxable income from the rentals.

Keep in mind that there are certain rules and limitations surrounding passive activity losses, and it's important to maintain proper records and documentation to support your claims. Additionally, tax laws can change over time, so it's a good idea to consult with a tax professional or CPA who can provide guidance tailored to your specific situation and the current tax laws in your jurisdiction.

John Malone · Answer

@Todd Kozak yes they net on form 8582