Incorporating to deduct rental losses

6 Replies

Last year I filed my taxes as single, and owned a rental that returned a loss. I was able to deduct the losses on my taxes.

This year, I am married. The same property once again has a loss. If we file jointly, it seems we cannot deduct the property losses due to income limitations, as we make over $150k jointly. With married filing separately, the allowable losses to deduct is zero.

Is there a way around this, such as putting our property under an LLC?

@Rob Stinogle

Just one more reason to not get married! ;)

There is no legal way around this limitation via entities. The law specifically designed to limit these losses. Now, some people work around this law by putting a property into an entity and then mis-classifying this business. It's not kosher however. Stay clean.

The loss is not wasted, only delayed. When you eventually sell the property, these suspended losses will be unlocked, regardless of your income.

"When you eventually sell the property, these suspended losses will be unlocked, regardless of your income."

Thanks for the message Michael! What exactly do you mean by this? How will these losses be unlocked when I sell?

@Rob Stinogle If you own it for 10 years and it has a $5k loss each year that you can't take you've now accrued $50k in losses that are just in limbo.

The year you sell it "frees up" those losses. So it will reduce your taxable income by $50k regardless of your income limit. 

The other option that allows for taking these losses is qualifying as a RE professional per IRS standards. Talk to your CPA about this option as it can be tricky. 

@Natalie Kolodij Should I keep track of these limbo losses each year until then? Is there a specific tax form I should be looking for when I eventually sell to claim these losses.

Thank you for the fantastic advice!

@Rob Stinogle The tax software will have a loss carryover. It will carry and track those losses for you until you dispose of it. 

At least it should. 

At least that's what my professional software does ;)

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