Real estate tax in California
Rental Property Investor · San Jose, CA · Member since 2017 · 37 posts · 11 votes
Real estate tax in California
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Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
6yAs always, thanks so much taking the time to explain complex, technical taxation topics. I actually had a vague notion of what you explained as taxation layers (first time I'm hearing of this term). But, when I sold my unit and went through the taxes, it didn't seem to turn out that way. That's why I feel it was "inefficient."
Anyway, thanks for setting me straight. Now that I know what I'm looking for, I'm going to see how the tax forms arrive at this when I have some free time, :) Again, thank you so much for your time and expertise.
31 Replies
- 6yLance LvovskyPro MemberAccountant · Fort Lauderdale, FL · Member since 2013 · 1k+ posts · 753 votes
@Sharon Hsu
If you have a capital loss, then Sch D for federal return. Needs to also be captured in your Ohio nonresident return (assuming you file as resident in CA).
- Rental Property Investor · San Jose, CA · Member since 2017 · 37 posts · 11 votes6y
@Lance Lvovsky thanks for responding. Would she also use a schedule D for operational losses from rental, evictions etc?
For some reason she used schedule E, not sure why.
- 6yBasit SiddiqiBusiness MemberAccountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
@Sharon Hsu
You have an overall loss from the sale of your rental property?
I find it that many tax preparers mess up how to report the sale of a rental property on their tax return because it is really a business asset.
The loss of a business asset does not result in a capital loss.
The thing is that the loss also does not get carried forward so that seems accurate.
Basit Siddiqi CPA4.979 Reviews - 6yMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
First, the states do not matter for Federal (IRS) taxes. They do matter for your state tax returns.
Second, income and expenses for a rental property are reported on Schedule E, including in the year of sale. So you should have Sch E with 2019 rent income (if any) and 2019 operational expenses prior to the sale.
The sale of the property is reported on Form 4797 from where it does flow to Schedule D. Whether there is a loss or a gain on the sale, it is completely applied to the current year. Nothing is supposed to be carried forward.
If there was a loss from previous years that was carried forward into 2019, then that loss should have been completely unlocked and used in 2019.
I have a suspicion that your return was not prepared correctly. If I were you, I would pay another accountant who specializes in real estate to review your return, even if it was already filed. Maybe it needs to be redone.
Some accountants may even be offering such reviews at no charge. Just keep in mind that this is an extremely busy time for us accountants prior to the Oct 15th IRS deadline.
By the way, my firm does not provide this service except for our advisory clients.
CORRECTION
Upon second reading, you said it was sold "recently" - recently as in 2020? If it was sold in 2020, there should be no Sch D on your 2019 tax return, only Sch E. If there's any loss to be carried forward from 2019 to 2020, it would be on Form 8582.
If it was sold in 2019, then my earlier answer stands.
- Rental Property Investor · San Jose, CA · Member since 2017 · 37 posts · 11 votes6y
@Michael Plaks thanks for your reply. My property was sold in Nov 2019. How much would it be to have an advisor review my tax return before my tax provider submits it? Thanks
- Rental Property Investor · San Jose, CA · Member since 2017 · 37 posts · 11 votes6y
@Michael Plaks so property sale loss, loss due to operational costs can not be carried forward even if the total can not be applied to 2019 taxes?
My friend sent this to me but he isn’t a tax preparer:
1. regarding rental property tax filing:
a. You will report your property losses, along with your rental income, on Form 1040 Schedule E,
then transfer the information to Line 17 Form 1040 Schedule 1.
b. You’ll only be able to claim rental property losses against other passive income, like rental property income.
***Rental property losses are considered passive losses, which means they can only be deducted from passive income.
If you don’t have enough in rental income for the tax year to offset your losses, you should be able to carry the excess over to a future year. However, you can only use the excess losses against other passive income, like rental property income. ***
- Rental Property Investor · San Jose, CA · Member since 2017 · 37 posts · 11 votes6y
@Basit Siddiqi interesting. My friend sent this to me so I’m confused:
1. regarding rental property tax filing:
a. You will report your property losses, along with your rental income, on Form 1040 Schedule E,
then transfer the information to Line 17 Form 1040 Schedule 1.
b. You’ll only be able to claim rental property losses against other passive income, like rental property income.
***Rental property losses are considered passive losses, which means they can only be deducted from passive income.
If you don’t have enough in rental income for the tax year to offset your losses, you should be able to carry the excess over to a future year. However, you can only use the excess losses against other passive income, like rental property income. ***
- 6yMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
Originally posted by @Sharon Hsu:
My friend sent this to me but he isn’t a tax preparer:
Your friend is exactly correct, except in the year of sale. In the year of sale, all losses related to this particular property are deductible.
I cannot answer about the cost of reviewing your return, because my firm does not do it (except for our advisory clients) and I cannot speak for my colleagues.
- 6yBasit SiddiqiBusiness MemberAccountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
A person who reviews the return before submission may be required to sign the tax return.
"tax provider" what does that even mean is he/she credentialed?
it seems like your "tax provider" knows how to report rental income(not surprised, it isint hard), but doesn't know how to report the sale.Basit Siddiqi CPA4.979 Reviews - Accountant · Albuquerque, NM · Member since 2019 · 43 posts · 30 votes6y
@Sharon Hsu Has your 2019 tax return been filed or are you trying to make the Oct 15 extension deadline?
Cara Powers, EA
- Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes6y
Originally posted by @Basit Siddiqi:
A person who reviews the return before submission may be required to sign the tax return.
"tax provider" what does that even mean is he/she credentialed?
it seems like your "tax provider" knows how to report rental income(not surprised, it isint hard), but doesn't know how to report the sale.Never thought about this before, but the ability to activate or harvest passive activity losses along with any associated realized losses and deduct it in the current tax year from the sale of a property at a loss appears to be somewhat of a silver lining. I.E., what would normally be used to offset against future passive income which is taxed at 20% can now be used to offset against ordinary income, which is potentially taxed at a much higher rate. So although I would much rather sell at a profit and use PALs to offset much of the realized gain, the silver lining is that I'll be able to offset against income that is taxed at 30-40%..or whatever your highest marginal tax rate is.
Someone please let me know if my understanding is off.
- Rental Property Investor · San Jose, CA · Member since 2017 · 37 posts · 11 votes6y
@Michael Plaks thanks! So I assume once I sell the rental property then I can’t carry my losses over to following years?
- Rental Property Investor · San Jose, CA · Member since 2017 · 37 posts · 11 votes6y
@Cara Powers I’m trying to make the 10/15 deadline. Although I might just submit it and revise it later.
- Rental Property Investor · San Jose, CA · Member since 2017 · 37 posts · 11 votes6y
@Michael Plaks thank you! This is all so confusing. I called 2 tax attorneys via Parker Stanbury and they both told me I could carry it over hence my hunt and search to figure this out. I then spoke w an EA and HR Block and they mentioned like you that once the rental is sold then you can’t carry your losses over to following years. Ugh. I’ve been spending so much time on this to find out that my tax preparer was correct and the tax attorneys were not. That’s interesting
- Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes6y
Right, you shouldn't be able to carry over your losses from the sale of a rental. I wasn't. I was selling off my "loser" and it generated so much losses it wiped out my taxable amount. After going through the tax forms (after my family's accountant prepared a return), I confirmed for myself that I can't carry over the direct losses.
Just be careful as your various gains/losses don't directly "cancel" each other out. The capital gains/losses and depreciation unrecapture find their way onto your 1040 via SchD and the related tax worksheets. Any accumulated passive allowed losses (PAL) for that property are "released" from SchE onto your 1040. In my particular predicament, when I sold one of my units I inefficiently used the losses since I didn't realize this. Just a lesson learned when you get around to selling to a rental and seeing how the tax forms work.
Honestly, I wouldn't be surprised that your tax attorney was not. This is more of an accounting issue than some legal matter. If you can find a CPA/accountant-JD they are great. You don't have to spend time talking to two professional and trying to remember which question to ask which professional. Or, have the conversation "break" when (s)he tells you its not in their lane...
I see that Plaks and Siddiqi are on this thread so between them you should be covered well. I hope this helps. Good luck.
- Rental Property Investor · San Jose, CA · Member since 2017 · 37 posts · 11 votes6y
@David M. From my research you seem to be correct for sure. Thank you for sharing your experience and knowledge. Gosh sort of disappointing to find out that not all losses can be carried over. My rental was bleeding money also so I’m just happy to get out and lesson learned.
- Rental Property Investor · San Jose, CA · Member since 2017 · 37 posts · 11 votes6y
@David M.when you say you inefficiently used your losses. What would you have done differently? Also it’s a good thing to not have to pay taxes unless I’m missing something when taxable income is wiped out.
- Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes6y
Basically, yes. The accumulated PAL gets "released" from SchE directly onto your 1040. So, those loses will directly be offset with your current ordinary income potentially taxed at a high marginal rate. The capitals gains/losses and depreciation unrecapture are calculated via SchD and related tax worksheets. So, they could be offset with whatever you have going on there (e.g. existing carryover capital losses). Depending on your specific circumstance, you might actually get a better tax break...
- Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes6y
Well, there wasn't much I could control. I only make so much money and I sold the property when I sold it...
In a perfect world, I'd rather just have my higher marginal rate "dollars" be offset fro the PAL. Look at the tax rate tables. The first $75k or so (depending on which year) is taxed at 10% and 12%. I'd rather pay tax in that bracket than in the twenty-something bracket... If I could have spreadout the losses, I could have gained $0.10 on the dollar in deductions, for example.
To do it better, I'm not sure if with an installment sale the PAL is also spreadout. Otherwise, I don't really know/remember. This was years ago when I sold the property.
As a side note, with study and experience I get to understand the tax system better (not "all knowing"). That's why I like being able to prepare my own returns. I can calculate on the fly / on my own time my taxes. I can see for myself the various tax consequences and try to plan according in advance.
I hope this helps. Good luck.
- Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes6y
Originally posted by @Sharon Hsu:
@David M. From my research you seem to be correct for sure. Thank you for sharing your experience and knowledge. Gosh sort of disappointing to find out that not all losses can be carried over. My rental was bleeding money also so I’m just happy to get out and lesson learned.
Whoa, hold on.
OK, so I think what the previous tax pros have been saying is that when you sell the property and you have a net loss, then you can offset that loss against your other income. Whereas, in prior years, you would not be able to offset it against your other income. Instead, you would only be able to offset it against your other passive income....and if you don't have enough passive income from other properties, the net-losses would carry-forward. Being able to offset the entire loss against your other income is a much better scenario than having to carry forward to future years.
So, as an example, let's say you sold the property at a $5,000 gain, but the passive losses from expenses and what not in 2019 were 2,000 and the passive losses carried over from prior years was 13,000. In this case, you'd be able to deduct the 10,000 net loss against your other income. So if you have a W-2 job, you'd be able to deduct 10,000 from that amount.
If you don't have a W-2 job or other income from which to deduct the above net operating $10,000 loss, then you can carry back the loss for two years and offset taxable income in those years, but you will have to file amended returns. If you still have NOL left over, then you can carry the remaining amounts into future years.
- 6yMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
Originally posted by @Sharon Hsu:
@Michael Plaks thanks! So I assume once I sell the rental property then I can’t carry my losses over to following years?
As was already explained by others - no. All of them are applied in the year of sale, even of you sell on installment sale.
Good plan to learn about taxes, not so good to self-prepare tax returns, in my opinion. You want to know enough about construction to supervise contractors and enough about cars to understand your mechanic, but do you want to fix your car yourself and do your own plumbing?
- Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes6y
Yep, there are lots of circumstances to consider which leads to a number of possible combinations/situations. That's why I mentioned it was just my case at the time years ago...
So, lets look at your hypothetical situation. I'm not getting where you got the $10k from... If your current year's passive losses are $2k (we are assuming they are losses) and you have $13k of carryover passive allowed losses, then you have $15k of passive losses. Since you are disposing of your entire interest in the property in question (and haven't elected to have them all lumped together), that $15k loss goes from SchE onto the 1040. If you had any other ordinary income, this $15k should deduct against them (if you look at it in a microscopic view). If you don't have other income, I thought with TCJA there was no carryback anymore, only carry forward. Also, in my particular case (and I;m not sure if Plaks covered it), it doesn't necessarily allow you to file for a NOL. I wasn't able to. Again, this was years ago and I don't remember exactly why. But, both my family accountant and my going through the forms confirmed this is the case.
Now, regarding your capital gains/losses. Your hypothetical situation has a $5k capital gain. This should be a long term gain (its been held for over a year, right?). So, depends on your situation, that $5k may never "go anywhere" if you have carryover long term losses. Meanwhile, on page 2 of SchD it leads you to a worksheet to calc your depreciation unrecapture. I don't understand the logic (and haven't spent the time to figure it out), but its possible to actually skip that worksheet (but you are still paying on the unrecapture as it works out). Anyway, its figured here and then onto your 1040.
Does this help?
- Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes6y
Thanks for reconfirming.
I understand what you are saying about using professionals. For my own returns, I stay within "what I need to know/do." When it came time to sell, yeah of course I needed a professional to make sure I did it correctly. I just would have been nice to know beforehand how it played out. I was expecting, out of wishful ignorance, that the PAL and the capital gains would be offset against each other first. Granted, had I known that ahead of time there wasn't much I could do since back then I had my salary job and couldn't earn/make more money (who wouldn't love to just "generate more income") to have enough to offset the massive PAL (like OP, I was offloading a poor performing rental).
Thanks again.
- Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes6y
Originally posted by @David M.:
Yep, there are lots of circumstances to consider which leads to a number of possible combinations/situations. That's why I mentioned it was just my case at the time years ago...
So, lets look at your hypothetical situation. I'm not getting where you got the $10k from... If your current year's passive losses are $2k (we are assuming they are losses) and you have $13k of carryover passive allowed losses, then you have $15k of passive losses. Since you are disposing of your entire interest in the property in question (and haven't elected to have them all lumped together), that $15k loss goes from SchE onto the 1040. If you had any other ordinary income, this $15k should deduct against them (if you look at it in a microscopic view). If you don't have other income, I thought with TCJA there was no carryback anymore, only carry forward. Also, in my particular case (and I;m not sure if Plaks covered it), it doesn't necessarily allow you to file for a NOL. I wasn't able to. Again, this was years ago and I don't remember exactly why. But, both my family accountant and my going through the forms confirmed this is the case.
Now, regarding your capital gains/losses. Your hypothetical situation has a $5k capital gain. This should be a long term gain (its been held for over a year, right?). So, depends on your situation, that $5k may never "go anywhere" if you have carryover long term losses. Meanwhile, on page 2 of SchD it leads you to a worksheet to calc your depreciation unrecapture. I don't understand the logic (and haven't spent the time to figure it out), but its possible to actually skip that worksheet (but you are still paying on the unrecapture as it works out). Anyway, its figured here and then onto your 1040.
Does this help?
Hi David,
Appreciate the detailed explanation. I wasn't exactly asking for help though...just providing a very high level example for the OP to understand. As for the exact mechanics on which schedules or sections of the return these items fall under, that really wasn't the point of my post as I'm trying to avoid further confusion from the original poster. Perhaps I oversimplified things a bit but the only point I was trying to make is that if you have a net loss of 10,000 on the sale of your property (of course, taking into account the recapture), that is deductible against non-passive income. There is no need to carry it forward into subsequent years. I'm not sure why you're confused about the $10K because you describe it in your second paragraph ($5K capital gain offsetting with the losses being carried forward). I didn't want to get into depreciation recapture as that would again, further complicate my answer and the last thing I wanted to do was to go into any granular details about the pathways from which each of these items flow through and ultimately end up unto the 1040.
- Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes6y
Oh, okay. Agree with trying to keep it simple.
But, the point I thought you were after is while one may think there is $10k of deductions on the 1040, there is really $15k of deductions against your ordinary income and $5k of capital gains. If you are planning on only having $10k of ordinary income to offset your thought of $10k, you'll find out that you really should have planned for $15k of ordinary income (assuming the $5k of capitals gains doesn't make it off SchD).
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