Passive losses, standard deduction

Investor · Washington, DC · Member since 2016 · 175 posts · 73 votes

Hi BPers,

Since the standard deduction is so high now at 24k for married couples, its looking like it makes more sense to do that than itemize. If I could deduct the full 25k in passive losses, that would be a different story, but I can't.

My question is, if I take the standard deduction, will all of the passive losses from that year be suspended and carried over to the next year?

Thanks!

Aaron

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Ashish AcharyaBusiness Member

CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes

@Aaron Smith

I get this question a lot.

What you need to understand is

1) SD is related to the personal side of your tax return. Everyone gets it. One who had million in revenue, or million in loss. Does not matter where the income or loss is coming from. Yes if your itemized deduction is greater than 24k, take that. Both standard deduction or itemized deduction are related to personal side of tax return.

2) passive losses are related to your business side of your tax return and has nothing to do with SD or ID.

SD and passive loss are not related.

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Eamonn McElroy
Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes
8y
@Aaron Smith "If I could deduct the full 25k in passive losses, that would be a different story, but I can't."
Not sure what you mean by that?
"My question is, if I take the standard deduction, will all of the passive losses from that year be suspended and carried over to the next year?"
I'm assuming you don't meet the tests for 'real estate professional' classification and your rental real estate tax income/loss will be passive. The active participation test that allows a taxpayer to deduct up to $25k of passive rental real estate losses has no bearing on if you use the standard deduction or itemize. It's solely governed by (1) AGI and (2) active participation.
It's important to note that a lot of taxpayers will take the standard deduction for 2018 at the federal level but will continue to itemize at the state level.
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Ashish AcharyaBusiness Member
CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
8y
@Aaron Smith
I get this question a lot.
What you need to understand is
1) SD is related to the personal side of your tax return. Everyone gets it. One who had million in revenue, or million in loss. Does not matter where the income or loss is coming from. Yes if your itemized deduction is greater than 24k, take that. Both standard deduction or itemized deduction are related to personal side of tax return.
2) passive losses are related to your business side of your tax return and has nothing to do with SD or ID.
SD and passive loss are not related.
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Aaron Smith
OP
Investor · Washington, DC · Member since 2016 · 175 posts · 73 votes
8y
@Ashish Acharya
So let me see if I can understand this. I can claim 24k standard deduction, plus take a passive loss deduction up to 25k? Just on federal taxes, or on all taxes?
What qualifies as the 'personal side' of the tax return? This would be W2 income, right? What deductions are there other than the interest and property tax deductions on a personal residence?
@Eamonn McElroy
No, I don't qualify as a real estate professional. Why would you take the standard deduction for federal and itemize at the state level?
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Eamonn McElroy
Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes
8y
@Aaron Smith "No, I don't qualify as a real estate professional. Why would you take the standard deduction for federal and itemize at the state level?"
It varies by state. Not all states require you to follow what was done on the federal return (itemize or standard deduction). It will be interesting to see if more states decouple for the 2018 tax year to counter balance the SALT cap.
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Ashish AcharyaBusiness Member
CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
8y
@Aaron Smith ,
So let me see if I can understand this. I can claim 24k standard deduction, plus take a passive loss deduction up to 25k? Just on federal taxes, or on all taxes?
Answer: Yes you can take both. There is no extra limitation on SD, but have various limitations and rules on passive loss deduction.
You can take all passive loss if you qualify as RE pro if planned correctly. IF you dont qualify as RE pro, you take up to 25k passive loss if you are active in your RE rentals and your AGI is less than 100k.
What qualifies as the 'personal side' of the tax return? This would be W2 income, right? What deductions are there other than the interest and property tax deductions on a personal residence?
Answer: There are various deductions. Mainly you can divide them into two categories:
1) Deduction for AGI.
2) Deduction from AGI ( if this is less than 24k, you would take SD)
I cant give you entire list as it is massive. Simple google search will help you.
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Matt Ward
Specialist · San Francisco Bay Area · Member since 2018 · 221 posts · 160 votes
8y
@Eamonn McElroy state conformity will be one of the biggest headaches of the TCJA in my opinion
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Eamonn McElroy
Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes
8y
@Matt Ward CCH State Tax SmartCharts are helpful. RIA also has a similar tool however I prefer CCH's version based on experience. Prefer RIA for pretty much everything else including research and editorial materials. Never been a fan of BNA....I know some people like it.
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Matt Ward
Specialist · San Francisco Bay Area · Member since 2018 · 221 posts · 160 votes
8y
Originally posted by @Eamonn McElroy:

@Matt Ward CCH State Tax SmartCharts are helpful. RIA also has a similar tool however I prefer CCH's version based on experience. Prefer RIA for pretty much everything else including research and editorial materials. Never been a fan of BNA....I know some people like it.
Yep agree completely. California (FTB) came up with a great conformity release but just saying that will be the part that takes more time than most people think, and most TPs realize.
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Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
8y
@Aaron Smith

You normally compare the standard deduction to your itemized deduction.
If the standard deduction is higher - you take standard deduction.
If itemized deduction is higher - you take itemized deductions.
You can compare the two options every year.

Standard deduction and ability to utilize the $25K passive loss deduction are not related.
You are eligible to utilize the $25k passive losses related to real estate and take either the standard deduction or itemize.

However, if your income goes above a certain threshold, you lose the ability to utilize the ability to deduct up-to $25K in passive losses unless you are considered a real estate professional.
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James Miller
Attorney · Fort Worth, TX · Member since 2015 · 372 posts · 176 votes
8y
Originally posted by @Matt Ward:
@Eamonn McElroy state conformity will be one of the biggest headaches of the TCJA in my opinion
Agreed.
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