CPA help: Report Rental Loss on 1040

5 Replies

2021 is my first year as a landlord and to save money I'm doing taxes myself for the first couple of years. To avoid doing anything wrong I wanted to double check a few things. Can any CPA's answer the below? I've scoured the forums for months as well as Google and the tax code, but still had some questions.

1. This first year I have a rental loss approaching the $25k passive activity limit for active participants. To report this, I fill out Schedule E which will show the total loss (negative value) which then transfers to 1040 Schedule 1, Part 1, Line 5 as negative. With nothing else this goes to Line 9 (as negative) and then transfers to Form 1040 Line 8 (other income) as a negative value. This negative value adds to the positive W-2 wages to reduce the total income? The instructions don't mention on how to handle negative values for Other Income, which is my confusion here.

2. For depreciation on one of the properties, I was planning on separating/segregating carpet, floating LVP flooring, cabinets, dishwasher, microwave, oven, and a shed as separate assets from the building and using 100% bonus depreciation to deduct fully this first year. From what I have found everything but the shed is 5 yr or 7 yr property; the shed is probably 15 yr property but I couldn't find concrete answer. 

Is there anything wrong with taking the 100% bonus depreciation on these (and subtracting their value from the total purchase price to calculate the building basis)? Would it increase risk of an audit?

3. Near the end of 2021, I'm planning on selling about $20k in ETF's which have about $10k in long term capital gains. With large 401k contributions and the ~$25k rental loss, my ordinary income will be about $21k and with the $10k in gains, total income should be $31k. I should be able to pay 0% on the capital gains, since none of the gains when added to ordinary income exceeded $40k?

Please let me know if I can't add the capital gains and W-2 wages, and subtract the $25k rental loss, to end up at MAGI! I want to harvest the gain (since I have the rental loss) and buy back to reset the basis.

Thank you in advance.

Just as a general note, I'd caution against taking large write-offs against ordinary income if your goal is to obtain bank financing. This may hamper your growth by limiting the properties you can get. If you can get some seller financing deals, then it's a bit of a moot point but my personal preference is to keep my options open. Also, for the large write-offs you could take, you're not getting that much in tax benefit. Since you're at a low marginal rate (and my prediction is that they won't go lower), I'm of the mind that you're stepping over dollars in the form of potentially foregoing buying additional bank financed properties. 

#3 is a good idea so you don't have to pay the capital gains. I would also say it'd be better to contribute to your roth 401(k) if you're going that route because you will probably be in a higher tax bracket later in life and you're not getting that much tax benefit for contributing (except potentially getting the savers credit).  

I hope this helps. 

1. Correct- Passive losses up to $25k offset ordinary income, assuming you materially particpiate in the property and AGI is under $100k. 

2. Yes, good idea- Breaking out those things on your own may require defense in audit since it's not clearly stated in tax code. Guidance as come from Court cases and interpretations on many of those items. 

3. Nothing wrong with taking 100% bonus  on assets w/ lives under 20 yeras

Side note: Lenders add back depreciation. So if your $25k loss is generated by depreciation you won't have an issue with lending

4. If you can keep your overall income including the cap gains in the limits for 0% cap gains is your best bet if possible. 

All of this being possible depends on your specific facts and circumstances though which is why sometimes a REI specailized tax expert is worth it- no one on here knows your specific financial situation.

Thank you for the replies!

I didn't consider how the lender would look at the tax return next year so need to verify with them my planning will work. I'll have many actual (non-depreciation) expenses over the next month for a make-ready on a new purchase tomorrow (fingers crossed). When added to a 1 month's rent placement fee from the property manager and just 2 months of rent income to offset for 2021, it will look very negative indeed!

Originally posted by @Brian Scott :

Thank you for the replies!

I didn't consider how the lender would look at the tax return next year so need to verify with them my planning will work. I'll have many actual (non-depreciation) expenses over the next month for a make-ready on a new purchase tomorrow (fingers crossed). When added to a 1 month's rent placement fee from the property manager and just 2 months of rent income to offset for 2021, it will look very negative indeed!

Costs to get a rental ready to rent are by default added to the basis (would be depreciated). You're not in service yet. 

The IRS views the cost/basis of a business asset as the total costs to have it able to do it's intended function. 

Example: You buy a commercial oven for a bakery. It's $10,000. Shipping is $2,000. Needs to be setup and programmed for $1,500. You had to have a cement slab poured to install it on $500. Total basis = $14,000


So there's also a good chance those expenses would/should be added to the depreciation schedule assuming this is a new rental being made rental-ready for the first time,

@Natalie Kolodij

Yes, that's a good point and I know what you are saying. I am working with my property manager to have it listed for rent asap after funding. It technically is ready for service as is, I just wanted to replace flooring with LVP and paint, room-by-room, while it's being shown so it'll be tenant resistant for a while. Since my labor is "free", the majority of costs could be bonus depreciated (LVP) separate from the building or small enough to be considered Repairs or Cleaning and Maintenance.

I'll probably run my reasoning and numbers by a local REI CPA to see if anything raises red flags though before filing. Definitely don't want an audit but still want to maximize benefits.

Thanks for the input.