Dealing with paper losses

5 Replies

With my rentals, I generate paper losses from operating expenses, repairs and depreciation. However, because of having 2 incomes in the household, my wife and I got phased out, and I cannot claim those losses against my w2 income. Now it seems that those losses are allowed to deduct gains from other passive activities. But what are the passive activities that are eligible to deduct the paper losses from?

I once thought that capital gains from stock investments can be negated from RE losses, but a friend of mine said that it's not eligible. 

So what other passive activities are actually eligible to be counted against RE paper losses ? Income from other rentals?

Other than being a real estate professional and spending 750 hours on it, what can someone do to realize the paper losses? Or just don't even bother?

A "paper loss" is unrealized loss.  Example, You purchase shares in a company for $1,000.00.  Several weeks later, your shares have a market value of just $850.00  You now have an "unrealized or paper loss" of $150.00  It's call a paper loss because you have lost it on paper but not "realized" it.  Because you still holding the shares.

From reading your question, I think what your saying is you have a passive losses.  Quite common in real estate investing.  You may even have positive cash flow and net income BEFORE depreciation of the property.  But depreciation will show you having a passive loss for tax purposes.

Passive losses can only be deducted from other passive income sources.  (Capital gains and dividends from stocks are not passive).  If you don't have other passive income to off set, you may carry over your loss to next year.  

If you are a "real estate professional" you may be able to deduct passive losses.  To be a real estate professional, you must A) spend over half your working hours in a year working on real estate.  So if your employee full time elsewhere, you're likely out.  B) You must have spent at least 750 hours a year on real estate activity.  So you can't just the 100 hours you spent in a year managing your properties makes you a real estate professional. 

Disclaimer: As with all tax questions, everybody situation is different and you should ask your own tax adviser.      


@Charles PressThank you very much for your answer. Sorry I haven't been able to response sooner.

You are right, what I meant to ask is 'Passive Losses', not necessarily paper losses.

What are other activities can be considered as passive investment? I guess participation in a syndication may qualify. 

With regards to being a 'Real Estate Professional', you quoted the requirement that:Spend at least 750 hours working on RE. What qualifies as working hour? Would education, looking for deals, talking to likeminded professionals ? Spending time in BP to learn?

Also, how would IRS validates the time spent doing that?

On the issue of passive losses, I'd find a good tax advisor.They can help you optimize your tax situation.

Activities that are count towards the 750 hour mark are going to involving the property.Acquisition, development, building, management, leasing, etc. Education and talking about real estate theory around the campfire isn't going to cut it.

What the IRS is looking for is, is real estate a full time occupation?Or are you an investor who happens have some real estate?Even that question can be tilted.You may start out as investor in a property or two but as your holdings grow, your time requirements overseeing it will as well.Thus making by default a "real estate professional".

Unless of course you become an oil tycoon but that's whole another problem.Again, find a good tax advisor but everybody's situation is different.

Ezra - passive activity losses are carried forward when not used, so you can use them to offset passive income in future years.  If they are unused upon sale  of the property then they can be used to offset the gain or tax on depreciation recapture upon sale.  Hope that this is helpful.  

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