Unable to use depreciation on the rental property

7 Replies

I got into rental property with the intention of using the depreciation on the property to help lower my taxable income. My accountant just let me know that I was unable to use any depreciation due to income limits.

I only had one duplex under my name in 2013 but I will have an additional townhouse and 4-plex under my name for next year. Any thoughts on how to structure these? I was reading that putting them in an LLC would not help.

If i went with a property management company would that change anything? (except make me cash flow a little less ! )

It would be helpful to know if you made too little or too much? How much your deduction could have been? Did you already have more deductions than you could use? I'm sure others will come up with more questions.

I was told depreciation begins to reduce at 100k and is gone by 150k in income.

@Judd Campbell

it's not that you can not use depreciation. On income over 150k you can not have passive loss. Thus your profit is zero for the year from rental. Any remaining loss can be carried over to next year (please check with a CPA).

IRS says "Generally, if your MAGI is $150,000 or more ($75,000 or more if you are married filing separately), there is no special allowance."

There are a lot discussions on BP on this topic

https://www.biggerpockets.com/search?utf8=%E2%9C%93&term=passive+loss#topics

Hmm. I found the IRS publication on that form.

http://www.irs.gov/pub/irs-pdf/i4562.pdf


@Ruslan Mamedov , that makes sense! I am waiting for my competed taxes to get mailed to me so I will check them over when they arrive. Perhaps I misunderstood my accountant.

I think your underlying question is whether or not you can use a passive loss from a rental property to offset ordinary income. Your account is correct that the "special allowance" that lets you do this (up to $25K in passive losses) begins to phase out when your AGI hits $100K and is completely phased out at $150K. Its unfortunate that the supposed "tax benefits" of crummy rentals are often used by unscrupulous sellers as lipstick to convince buyers to buy these properties. Good rentals product taxable income, even after depreciation. Not passive losses.

However, now that you're here, you need to continue to track your losses. You can carry these forward and use them when you sell a rental. Any rental, not just the one producing the losses (though, you should avoid acquiring more loss-producing properties.) As depreciation is taken (or allowed, if not taken) the basis in your property is reduced by the amount of depreciation. That increases your gain and results in the tax on unrecaptured depreciation, currently 25%. You will want to apply those carry forward losses to offset those gains.

The only thing you can really do to use the passive lossses immediately is to become a real estate professional. That means you have to spend at least 750 hours per year doing real estate work AND you have to spend more hours doing that than anything else. So, if you have a full time job, 2080 hours per year, you will need to spend 2081 hours per year on real estate activities.

I suspect someone touted the tax advantages of these properties to you. Hopefully they didn't convince you of other big lies often told new investors. Like "cash flow = rent - PITI."

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