Best way to book passive losses

2 Replies

I am a buy and hold investor and I have been in acquisition phase where I am buying properties and fixing them up and renting them out. In the process, i am accumulating a lot of passive losses every year. Without considering taxes, it get added to equity and I grow my portfolio price but I am not sure if I understand how to benefit from these passive losses in terms of making my investment tax efficient in short term and long term. 

Question: If my net cash-flow from various properties is negative (due to large rehab projects in some of the properties), how best to log them in my tax returns? Is there a way to carry them forward? Or if not, how can I document them to ensure that I can add them to my purchase price when selling to reduce my capital gains taxes?

Some background

- I have a full time day job and nowhere near being classified as Real Estate professional

- All my properties are using conventional financing

If you are using a CPA, that person will do all this for you.  If you use one of the national brand tax preparation software programs, such as TurboTax, the software handles everything for you.  

I have been using TurboTax since 1994.  TurboTax handles passive loss carry forwards for each property, and then handles the tax reporting of suspended losses for each property that is sold during the tax year.  

Passive losses do not get added to your equity, at least not directly.  Your equity is the difference between the value of your property and your loan balance if you do not own the property free and clear.  If a rehab increases the market value of the property, then the amount of that increase also increases equity.  However, not all rehab projects increase the property value on a dollar-for-dollar basis.  On the other hand, suspended losses affect how much tax you might pay on the sale of the property, but your equity is not affected by suspended losses.

If you have rehab expenses, you should be adding those costs to your tax basis for the applicable property. You recover those rehab costs through depreciation as long as you have the property in service as a rental.

I think the OP meant added to basis, not equity. We need a tax professional to answer, like @Steven Hamilton II who knows way more than me what the answer is.

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