Rental Property Deduction Limit

[Zulu Black]

Hello All,

This year, in July I started to enter the realm of real estate investing by renting out my SFH for $4k/month. I also have a full-time engineering job. I understand an individual may deduct up to $25,000 of real estate loss per year as long as their income <$100,000. However, my combined allowable deductible (property tax,depreciation, mortgage interest) already exceeds that amount.

I read this threshold doesn't apply if you're classified as a "real estate professional". Although my full time job is in engineering, I am in the process of starting an LLC with my partner. We're planning to invest into rental properties and I feel that I've exceeded the 750 hours mark.

I want to ask if there's a way to be able to deduct more that the allowable $25,000.

Thanks. I appreciate all comments. 

[Ashish Acharya]

Originally posted by @Zulu Black:

Hello All,

This year, in July I started to enter the realm of real estate investing by renting out my SFH for $4k/month. I also have a full-time engineering job. I understand an individual may deduct up to $25,000 of real estate loss per year as long as their income <$100,000. However, my combined allowable deductible (property tax,depreciation, mortgage interest) already exceeds that amount.

I read this threshold doesn't apply if you're classified as a "real estate professional". Although my full time job is in engineering, I am in the process of starting an LLC with my partner. We're planning to invest into rental properties and I feel that I've exceeded the 750 hours mark.

I want to ask if there's a way to be able to deduct more that the allowable $25,000.

Thanks. I appreciate all

“I read this threshold doesn't apply if you're classified as a "real estate professional".

Not correct. Even if you are RE pro, you can qualify for 25k on properties you don’t materially participate. 

also, with full time job, it’s hard to qualify as RE pro. Maybe your wife can? 

[Eamonn McElroy]

Although it's not impossible to qualify as an RE pro in your situation, it is improbable.

750 hours is just one of the prongs.  The second is that more than 50% of the services you provide must be in real estate trade or business(es) in which you materially participate and are at least a 5% owner.

This means if you're a full-time engineer, you'd be working more than 4,000 hours per year with your W-2 and real estate activities, which averages out to 77 hours per week, every week of the year...Christmas, Thanksgiving, Fourth of July weeks, no exception.

Again, not impossible, but highly improbable.

It's also improbable you have 750 hours with just one rental.  Reading online articles, Biggerpockets, etc doesn't count.

[Michael Plaks]

@Zulu Black

I'll word it stronger than @Eamonn McElroy did: it IS impossible when you have a full-time job. The only possibility for you to qualify as a RE Pro is if you're married, and your spouse qualifies - i.e. your spouse does not have a full-time W2 job but works heavily in real estate. 

There is also NO way you exceeded 750 hours that count for the RE pro designation. Reading books and BP forums is highly encouraged, but these hours do not count. Neither does mingling at local REI events.

I'm also wondering why would you need room for more than $25,000 on just one SFH property. You should not have that much loss on one house, even in NY.

As to the $25,000 allowance itself, it is phased out once your income reaches $100k and disappears completely at $150k. As an engineer, you might be there already. 

[Brian Poppleton]

If you or your spouse can't qualify as real estate pro, then the next option is to create passive income somewhere else that the Real estate loss can offset.