How do rental losses work if income is over $150?
Investor · Baltimore, MD · Member since 2019 · 164 posts · 47 votes
How do rental losses work if income is over $150?
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Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
2yQuote from @Arthur Schwartz:
Hi there! I am interested in how rental losses work if income is over $150K and if not a real estate professional. First, I suppose that these losses can be carried forward but how are they eventually taken? Only in the year of sale of that property? What if a different property is sold; can the loss carryforward from property A somehow offset a capital gain on property B? Second, is the accumulated loss offset against W2 income or offset against capital gains? Third, say one property is cash flow negative, another cash flow positive? Are all properties looked at as a group? (If these questions are basic, please forgive me.) If there's is a simple illustration with hypothetical numbers, it would be appreciated. Thank you! (Rental loss = repairs or renovations exceeding rental income)
If you are a high earner, you generally want to get advice from a CPA that understands real estate income & taxes, but here's a few thoughts:
1. Losses are going to offset future income. Your basis in the home is not going to change so when you sell you're still going to recapture depreciation and pay capital gains unless you 1031 or you don't have any gains.
2. Income losses doesn't offset capital gains so that should answer that batch of questions in the middle.
3. Losses don't offset W2 income unless you can qualify as a RE professional. If you are married and have a partner that doesn't work, you may be able to do this if you keep good records and are essentially managing the properties yourself.
4. Income is going to be in the aggregate, so yes if you have 3 properties netting $10k each and one property that loses $30k your net income is $0.
*Most* of the time, especially early in your investing, you can book enough losses to offset income between improvements, depreciation, taxes, insurance, mortgage interest, vacancies. Once you start getting a good number of properties this becomes more difficult unless you're constantly buying wrecks that you can book big losses during the year. This was how I did it until I retired.
Skyline Properties
9 Replies
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes2y
Quote from @Arthur Schwartz:
Hi there! I am interested in how rental losses work if income is over $150K and if not a real estate professional. First, I suppose that these losses can be carried forward but how are they eventually taken? Only in the year of sale of that property? What if a different property is sold; can the loss carryforward from property A somehow offset a capital gain on property B? Second, is the accumulated loss offset against W2 income or offset against capital gains? Third, say one property is cash flow negative, another cash flow positive? Are all properties looked at as a group? (If these questions are basic, please forgive me.) If there's is a simple illustration with hypothetical numbers, it would be appreciated. Thank you! (Rental loss = repairs or renovations exceeding rental income)
If you are a high earner, you generally want to get advice from a CPA that understands real estate income & taxes, but here's a few thoughts:
1. Losses are going to offset future income. Your basis in the home is not going to change so when you sell you're still going to recapture depreciation and pay capital gains unless you 1031 or you don't have any gains.
2. Income losses doesn't offset capital gains so that should answer that batch of questions in the middle.
3. Losses don't offset W2 income unless you can qualify as a RE professional. If you are married and have a partner that doesn't work, you may be able to do this if you keep good records and are essentially managing the properties yourself.
4. Income is going to be in the aggregate, so yes if you have 3 properties netting $10k each and one property that loses $30k your net income is $0.
*Most* of the time, especially early in your investing, you can book enough losses to offset income between improvements, depreciation, taxes, insurance, mortgage interest, vacancies. Once you start getting a good number of properties this becomes more difficult unless you're constantly buying wrecks that you can book big losses during the year. This was how I did it until I retired.
Skyline Properties - Investor · Baltimore, MD · Member since 2019 · 164 posts · 47 votes2y
Thank you! I decided to hire a CPA! But I do want to know myself. So, If I understand correctly, if I have a property where rental income is say $10K, but expenses are $12k, that $2K is carried forward indefinitely until.... what? and when? It can only be offset against positive income from another rental property or properties? What if I sell that property for a capital gain of say $50K? Can the $2k reduce the otherwise reportable capital gain from $50K to $48K? Can the $2k ever offset taxable w2 income? The numbers are hypothetical, the goal is I want very much to understand the concept. (Yes plenty of my acquisitions are "wrecks" as you call it, and require significant expense to be made great...). Thank you very much!
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes2y
Quote from @Arthur Schwartz:
Thank you! I decided to hire a CPA! But I do want to know myself. So, If I understand correctly, if I have a property where rental income is say $10K, but expenses are $12k, that $2K is carried forward indefinitely until.... what? and when? It can only be offset against positive income from another rental property or properties? What if I sell that property for a capital gain of say $50K? Can the $2k reduce the otherwise reportable capital gain from $50K to $48K? Can the $2k ever offset taxable w2 income? The numbers are hypothetical, the goal is I want very much to understand the concept. (Yes plenty of my acquisitions are "wrecks" as you call it, and require significant expense to be made great...). Thank you very much!
The $2k can carry forward to offset passive rental income the following year. Cannot offset W2 income unless you or your spouse can become a real estate professional. If you both have jobs, forget about that strategy as you'll never meet the threshold. No, the $2k will not reduce your capital gain. If you decide to sell it before you are able to use the additional $2k loss then it would just be washed away.
Just think about it as income buckets. W2 income goes into one bucket. Passive real estate income (and offset losses) goes into another bucket. Capital gains (and losses) go into a third bucket. The only way you can mix any of those together is to be a real estate professional.
Skyline Properties - Investor · Baltimore, MD · Member since 2019 · 164 posts · 47 votes2y
Thanks! I've got the picture! Very grateful to you!!!
- 2yBasit SiddiqiBusiness MemberAccountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
If your income is above $150,000 and you are not eligible to claim real estate professional status, your rental losses become suspended into a future year.
The suspended losses can be utilized in one of a couple ways
1) You dispose of the property
2) You generate passive income from this property or another property
Basit Siddiqi CPA4.979 Reviews - 2yNate MeekerBusiness MemberReal Estate CPA | California · Member since 2020 · 543 posts · 251 votes
@Arthur Schwartz a good CPA should be able to explain this. Everything boils down to Form 8582. Read the instructions on this form from the IRS. Passive losses goes against passive income in a year by year case. Same thing with carryover capital losses from short or long sales.
The CPA Realtor 569 Reviews - Member since 2024 · 5 posts · 1 vote2y
@jd
@JD Martin can you please explain what you mean by loses can carry forward to offset passive rental income the following year?
I have two rental units. My income was 27,600$ on one and 24,120$ on the other. Minus expenses and depreciation, one came in at -3724$ and the other-32,362$. How do these numbers carry to the following year? What are they dedicated from?
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes2y
Quote from @Som Jafari:
@jd
@JD Martin can you please explain what you mean by loses can carry forward to offset passive rental income the following year?
I have two rental units. My income was 27,600$ on one and 24,120$ on the other. Minus expenses and depreciation, one came in at -3724$ and the other-32,362$. How do these numbers carry to the following year? What are they dedicated from?
So let's say next year your income on the first one after next year's deductions is $3724 and let's say the income on the second one after next year's deductions is $16,000. You'll carry forward your unused losses on the first one which will net out to zero, and you'll carry forward your unused losses on the second one to the tune of $16k which will leave you another $16,362 to carry forward to the following year.
Obviously this is only useful if you have properties that (eventually) turn a profit. If all of your properties never turn a profit, then carrying losses forward every year will have no real value for you, but then you will probably eventually get a call from someone at the IRS since the point of investing is to make a profit. If you're doing this right it is virtually impossible to avoid the tax man forever.
Skyline Properties - Member since 2021 · 6 posts · 2 votes2y
I have read this thread. I am a newbie and still a bit confused, but my question is, at least, similar. We are married filing jointly with an income close to 150k last year. We own one rental property. No actual profit last year. Our monthly rental payment from the tenant was almost exactly the same amount as our monthly mortgage payment plus we did about 10k of repairs plus depreciation. I assumed that we would end up basically owing nothing since depreciation, repairs and non-principle portion of our mortgage payment on the house greatly outstripped the amount paid toward principle.
The tax preparer said we had to pay taxes on essentially the entire rental payment since our income was basically at 150k. This flies in the face of everything I have been told. I thought that, at least I could deduct property taxes, Interest, PMI and Home owner's insurance.
I am being told that, basically, we have to treat the entire rent check as taxable profit because of our income. I looked that the 8582 form, and it seems like that is true, but I am really hoping not. Any clarification would be greatly appreciated!
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