Deduction phase-out question.

1 Reply

Although I owed a duplex as a primary residence in the past, I'm just now getting into multi-families as investment vehicles- mostly buy and hold for cash flow.

My income is moderate, but combined with my wife's we regularly have a gross income over $100k.  I understand that there are deductions that start to phase out with higher incomes, by I'm not sure exactly how this works.  

So what phases out?  

a. Expenses?  I'm assuming that all expenses (management, taxes, water) etc. are deductable.

b. Depreciation- I'm more concerned about this one.  Does depreciation phase out for both capital improvements (shortened schedules) and purchase value (27.5 yr.)  

If so, how would I go about lowering my AGI (MAGI?) to below the phase-outs?

Any resources for a clear and concise discussion of this would definitely be appreciated!

If you are asking only about the rental expenses that you enter on Schedule E, then there is nothing that phases out.  You can take all your legitimate deductions against rental income regardless of the amount of other income.

i believe you may be thinking about the net passive loss allowance that begins to phase out when MAGI exceeds $100K.  Assuming you hold your rental property in your own name (not as a limited partner or as the beneficiary of a trust), AND, you actively participate in the rental activity, then you are allowed to offset your other ordinary income by up to $25K in net passive losses from your residential rental activity.  This is an exception to the general rule that losses from passive activities can only offset passive income and this exception only applies to residential rental activities.  

When your MAGI reaches $100K the net passive loss allowance is reduced by 50 cents for every dollar of MAGI over $100K, and phased out completely when MAGI reaches $150K. This phase out DOES NOT mean that you lose the rental expense deductions, it simply means that you can't deduct your net passive rental losses against your ordinary income, but instead, you have to carry your losses forward until either your income drops below $100K or you sell the property.  You need to do some calculations to see whether the phase out really affects you.  For example, if your MAGI is $120K, then your net passive loss allowance is reduced to $15K.  If the net passive loss from your rental activity is $12K, then you can still use all of your net passive loss from your residential rental activity to offset your other ordinary income.  

Ways to reduce your MAGI?  Your MAGI is essentially your AGI (line 37 of your 1040) with all reductions added back in.  To reduce this number, you literally have to learn less income -- not something you should want to do unless you or your spouse wants to become the sole breadwinner.