Question on writing off Rental Income to Zero

14 Replies

With last years taxes, I was able to write off my rental income down to zero through depreciation, repairs, hoa's, taxes, insurance, etc on my rental properties.

Since I do not meet the qualifications to go to $-25,000 I was wondering if the additional money I could have written off can be passed on to next years taxes? This is common with other situations such as short term stock losses but I cannot find any specific information on this??

Zach

Yes - passive losses carry forward year over year until you have a year where you do not have income as high or you sell.  In the event you sell, all of the accumulated passive losses will get written off in order to lower your overall tax scenario.

If you use the same tax preparer (or the better self prep software packages), those passive losses should get "saved" every year and then will be available to use when applicable.

@Zach P. - I'll leave the CPAs to the CPA question, but one thing I should point out:

In the future, and for the lurkers, keep all your invoices for those one-time repairs and see if you can get your CPA to put them on Line 19 "See Statement X" and itemize out the repair expenses line by line to match dollar for dollar what is on those invoices. Also make sure box 2 "fair rental days" is accurate. 

CPA may charge a little extra for that, but it'll ensure your lender-calculated DTI isn't a mess when attempting to get fannie/freddie mortgages in the subsequent two tax years. Generally the cost of hard money will trump that little extra bit your CPA charges you... by a lot.

Done this way, I've had REI with multiple properties have a negative number on line 21, but still calculated as cash flow positive because that level of detail on the tax returns (and adding back depreciation) allowed me to do so. Not done this way, I have seen folks capped at 1 BRrrrrr per two years and/or have to use hard money.

And incidentally I have a question for CPAs here. Some CPAs push back when asked to put one-time repairs on line 19 "See Statement X" instead of line 14 where it is un-itemized. Some also want to always put 365 days in box 2 even if the property was only owned for 5 months of that tax year. Some do not push back against any of this. Insight into why that is? @Linda Weygant ?

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Originally posted by :

And incidentally I have a question for CPAs here. Some CPAs push back when asked to put one-time repairs on line 19 "See Statement X" instead of line 14 where it is un-itemized. Some also want to always put 365 days in box 2 even if the property was only owned for 5 months of that tax year. Some do not push back against any of this. Insight into why that is? @Linda Weygant?

I don't know why a CPA would push back. If a client asked, I would do it. Although the nature of repairs is generally somewhat ongoing, you know? If it's spending $500 repairing a bunch of stuff this year, it's probably going to be $500 repairing a bunch of stuff next year too, just different stuff (depending on the age and condition of your property, I guess), so I'm not sure why an underwriter would add regular, ongoing repairs back to the DTI calculation.

However, if you're talking about items that used to require capitalization, that are now allowable as an expense under the new de minimus safe harbor regulations, then yeah - that's not really a repair, it's capital improvement that's permitted to be expensed, so I'd argue that line 19 is technically more appropriate.  

The 365 rule is a different issue entirely.  I have no idea why anybody would put something other than the days that it was rented or available for rental.

@Linda Weygant

@Chris M

Thanks. I did it with H&R block for last year and didn't see what the saved number even was.

My last mortgage was a real pain to get. All this positive cash flow and I feel like I barely qualified...

Originally posted by @Linda Weygant :
Originally posted by :

And incidentally I have a question for CPAs here. Some CPAs push back when asked to put one-time repairs on line 19 "See Statement X" instead of line 14 where it is un-itemized. Some also want to always put 365 days in box 2 even if the property was only owned for 5 months of that tax year. Some do not push back against any of this. Insight into why that is? @Linda Weygant?

 I don't know why a CPA would push back.  If a client asked, I would do it.  (1) Although the nature of repairs is generally somewhat ongoing, you know?  If it's spending $500 repairing a bunch of stuff this year, it's probably going to be $500 repairing a bunch of stuff next year too, just different stuff (depending on the age and condition of your property, I guess), so I'm not sure why an underwriter would add regular, ongoing repairs back to the DTI calculation.

However, if you're talking about items that used to require capitalization, that are now allowable as an expense under the new de minimus safe harbor regulations, then yeah - that's not really a repair, it's capital improvement that's permitted to be expensed, so I'd argue that line 19 is technically more appropriate.  

(2) The 365 rule is a different issue entirely.  I have no idea why anybody would put something other than the days that it was rented or available for rental.

 Thanks for replying, Linda.

(1) Yeah, that's what we want to be able to show the underwriter. Deep cleaning the carpets between tenants is recurring and appropriate to include if we're taking a 2 year average. Little things like plumbing a clogged toilet, same thing (so go ahead and put them on the 'repairs' line if you wish. Redoing the electrical, or a new roof, the big $15k things, is not recurring in the sense that it would be reasonable to include in a two year average. This is generally one where common sense prevails, if-and-only-if it's broken out and itemized somewhere in the tax returns. If it's all shoved into the "repairs" as a single $40,000 line-item, that can be a DTI killer or a "management judgement call" that isn't made until after scheduled removal of loan contingency (and we can't have that!).

(2) Thanks, neither do I. Follow up question though. Say it's not available for rental for 2 months because renovations are ongoing. Is that a personal use day or a fair rental day? Do the two columns have to add up to 365? I've heard conflicting info from CPAs and consider you credible from what I've read of your writing.

Originally posted by @Zach P. :

@Linda Weygant

@Chris M

Thanks. I did it with H&R block for last year and didn't see what the saved number even was.

My last mortgage was a real pain to get. All this positive cash flow and I feel like I barely qualified...

 I'd suggest getting a human CPA and getting them on the phone with your go-to loan officer with both of them having copies of your previous years' return in front of them.

"All this positive cash flow and I barely qualify" means that your taxes "ain't right" about 95% of the time. As in, if I looked at them, I'd go "I'm no fancy pants city slicker CPA, but that right thar ain't right, no sir-ey."

If you save $500 by using software, and then miss out on a $300k opportunity because of it, I'm going to say that you didn't really "save" $500.

@Zach P. I can't speak to any of the technical side, but I will say to get a real CPA. H&R block is not what you want to use. I doubt you'd go to Grease Monkey to get your engine worked on. Give @Linda Weygant a call, or one of the other CPAs that specialize in RE. The small cost over H&R Block will save you tons more. And being able to ask advice through the year and do planning with someone knowledgeable is priceless.

Best of luck and happy investing!

Yes, any losses can be carried forward until the time when you can take them...or you sell and those losses can then be used to offset your gains.

One thing I would keep in mind, is that lenders may not like to see that loss on schedule E. The last couple years I did not take all the deductions I was entitled to because I wanted schedule E to show a profit and not a loss, thus making my future borrowing a bit easier.

I have another question on this. Lets say property A was $5000 positive at the end of the year after all deductions and property B was $3000 in the negative. 

If you only qualify to write off down to 0, is your taxable income $5000 or can you combine properties together so your taxable income is only $2000?

Thanks! 

Originally posted by @Zach P.:

I have another question on this. Lets say property A was $5000 positive at the end of the year after all deductions and property B was $3000 in the negative. 

If you only qualify to write off down to 0, is your taxable income $5000 or can you combine properties together so your taxable income is only $2000?

Thanks! 

Anyone here have an answer for this? Any CPAs on here?

Originally posted by @Zach P. :

I have another question on this. Lets say property A was $5000 positive at the end of the year after all deductions and property B was $3000 in the negative. 

If you only qualify to write off down to 0, is your taxable income $5000 or can you combine properties together so your taxable income is only $2000?

Thanks! 

 Property A and B net against each other, so your taxable income is $2000.

@Zach P.

I am confused by your question.  Why do you say you can only "write off" your rental income down to zero?  There is a net passive loss allowance for residential rental property that let's you take a deduction for up to $25K in losses from your rental activity subject to income caps

.Are you saying that you don't have any other income and can't use the net passive loss allowance?  Perhaps if you give an example with numbers, your question will be clearer.

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Originally posted by @Linda Weygant :
Originally posted by @Zach P.:

I have another question on this. Lets say property A was $5000 positive at the end of the year after all deductions and property B was $3000 in the negative. 

If you only qualify to write off down to 0, is your taxable income $5000 or can you combine properties together so your taxable income is only $2000?

Thanks! 

 Property A and B net against each other, so your taxable income is $2000.

 Thanks Linda

Originally posted by @Dave Toelkes :

@Zach P.

I am confused by your question.  Why do you say you can only "write off" your rental income down to zero?  There is a net passive loss allowance for residential rental property that let's you take a deduction for up to $25K in losses from your rental activity subject to income caps

.Are you saying that you don't have any other income and can't use the net passive loss allowance?  Perhaps if you give an example with numbers, your question will be clearer.

Nope. I got it answered though so I understand it now. Thanks Dave.