Capital Expenditure offsets income

6 Replies

If my capital expenditures on a rental property exceed my rental income, can I use those expenses to offset W2 income or does it only offset passive income? I just got my first rental property rented and I’m trying to decoy if I should make capital improvements this year and get my losses out of the way.

Hey @Anthony Conrad , if your rental property takes a loss you can deduct the loss off your W2 income depending on how much you make.  If you (and your household if filing jointly) make under $100k, you can take the whole loss.  If you make between $100k-$150K, you take it on a sliding scale.  After $150k, you can't take any of it.  It does rollover in the future till you can take it which will most likely be when you sell the property.  

Since these are cap-ex projects, you will need to calculate the deprecation schedule of the items.  Even though you paid $900 for a fridge this year, you can only take 20% of that since it has a 5-year schedule for example. 

Originally posted by @Brad Hammond :

Hey @Anthony Conrad , if your rental property takes a loss you can deduct the loss off your W2 income depending on how much you make.  If you (and your household if filing jointly) make under $100k, you can take the whole loss.  If you make between $100k-$150K, you take it on a sliding scale.  After $150k, you can't take any of it.  It does rollover in the future till you can take it which will most likely be when you sell the property.  

Since these are cap-ex projects, you will need to calculate the deprecation schedule of the items.  Even though you paid $900 for a fridge this year, you can only take 20% of that since it has a 5-year schedule for example. 

Mostly right, but you can take 100% deduction on the fridge mentioned above. 

Also, the above mentioned active participation exception (25k loss) only comes into play if taxpayer is not a real estate professional. If you could qualify as a RE pro,  and meet the other requirements, your losses are not limited. Pleae talk to your advisor if you dont understand this fully. You dont want to miss out on the opportunity of any tax savings. 

@Ashish Acharya . I definitely won’t qualify as a RE pro with one property. I have capital expenditures like a roof and driveway that will be in the not too distant future. I’m just exploring my options to see if there is a more strategic way incur the expense. Thanks for all the insight!

Improvements / capital improvements normally need to be capitalized and depreciated.
There are some exceptions if it falls under the de minimis safe harbor election.

Whether rental losses can offset other income such as W-2 will depend on your MAGI(modified adjusted gross income aka income) or whether you can claim real estate professional status.