Must itemize to claim rental losses on schedule E?

28 Replies

Hello BP community.  I have 2 rental properties. One shows profit, and the other shows a loss. My accountant says that I can't deduct the losses because the "standard deduction" is higher than my losses. So there is no reason to include the loss property on my schedule E. Is this correct or do I need to find a new accountant?

@Joel Trout I am not an accountant, so take this with a grain of salt, but how does the loss compare to the gain? In other words, did the profitable property earn more than the other property lost?

And the standard deduction stands in for all other deductions. It's $12,400 for the 2020 tax year ($24,800 if filing jointly), so if your loss plus all other deductions / losses is lower than that amount, the standard deduction would likely be a better option.

Regardless, I always recommend finding a CPA that specializes in rental properties. They won't just advise you on your current tax return but also on your investing strategy. There are things you can do immediately that will impact future taxes. If your accountant is not that, it may be worthwhile shopping around, even if he's right on this.

@Joel Trout

This is so so so wrong, whether you itemize or take the standard deduction is completely independent relative to schedule e. Also, recognizing income and losses on your rental properties isn’t a choice, you must!

Not a CPA, but what they are saying sounds legitimate.  You total up all your deductions if you were to itemize and if its less than the standard deduction, you take the standard since its in your favor.

I thought Schedule E was required to calculate your net rental income to be included on the income portion of the tax return.  Didn't think it had anything to do with itemizing or standard deductions.  Keeping an eye on this post to make sure I haven't misundertsood this concept.

According to my CPA, my net rental income would be $500. (Profit on one property) and since I don't itemize,  the loss on the other property is not counted.  He said a loss on one rental property cannot offset the gain on another unless you itemize. 

I'm with @Diana T.  

I think the accountants here in BP need to chime in and tell this guy to fire his accountant.  You don't get to ignore your investment properties on your taxes.

@Joel Trout

By way of background, I am a cpa ( a partner at a large firm nonetheless), and I also hold an MST (master of science in tax). I am not just spitballing here, you are getting bad advice.

@Joel Trout just the way you are phrasing the question leads me to believe you may be confusing what your accountant is telling you. Whether you itemize or take the standard deduction is a different topic then showing loss or gain on a Schedule E. Is it possible they meant that you cannot take the rental loss against your W2 income? Regardless, you are going to want to claim both properties on your Schedule E. Either the loss can be realized in the current tax year or carried forward to offset future profits.

Talk to your accountant more about this. I have a suspicion they are talking about passive loss limitations. As them why you can't carry forward the loss to offset future profits.

@ Diana T

So, in his example, on his Schedule E, would he ultimately report a rental income of zero (Property A = $500 profit vs Property B = $2,300 loss) ... using the loss to the extent that he has a profit?  If so, can the loss be carried forward to a future year?  I know I'm getting into the weeds, but I want to make sure I understand this concept for my own taxes.

Joe splitrock they wouldn't put the second property on my schedule E because it showed a loss and according to them,  there is no way I can use that loss or roll it over since I do not itemize my return. And also I cannot use the loss on one property to offset the gain on another property unless I itemize. 

@Joel Trout itemized deductions are only for personal deductions that go onto Schedule A. If your properties are strictly for rental purposes and not used for any personal activity, all expenses for those properties should be reported on Schedule E regardless of your decision to itemize your schedule A deductions.

@Joel Trout . @Joe Splitrock Hits the most important points on this, and I just wanted to elaborate a little further. 

This situation can be a tricky situation as it involves a "phase-out" (and potential carryforward to future years) that is a result of your personal Adjusted Gross Income (AGI - and more on this below). I'm a CPA, but fair warning that RE and Personal Taxes are not my background. However, this article seems to be very helpful concerning this type of issue. I should note that I am assuming that this is "Passive Income" (which is what Sch. E is for) and that you are not a "Real Estate Professional," which would change things.

TLDR - If your AGI is below 100K, then you should be able to deduct up to $25,000 as a loss annually. If your AGI is between $100-150K, then there is a "phase out calculation" - essentially meaning that each dollar higher your AGI is, than you are able to take less of a loss for that year. If your AGI is >$150K, then you are not able to deduct any losses for that year and have to carryforward the loss.

FYI - Your AGI is found on Line 11 of your 1040, before any Standard or Itemized Deductions (Ln. 12) are taken into account, and this arriving at your Taxable Income (Ln. 15)

Even though you may not be able to deduct your loss in 2020 (assuming that is the year in question), you are able to carryforward (CF) that loss to future years (see Form 8582 - Passive Activity Loss Limitations). I am not certain, however, I would assume you would be able to have that CF amount to offset any rental income on Sch. E in future years.

Last note, I didn't see anything mentioning Itemized Deductions, and quite honestly I am not sure where Itemized Deductions would come into play with this. Don't quote me on that, as RE and even Personal Taxes are not my background. However, I hope this doesn't confuse you further and that it is helpful!

Haha,  Anthony King. I paid off the mortgage and raised the rent 600% so it would have cashflowed pretty decently this year, but I just sold it a few days ago. Needed the capital.

@Joel Trout this thread should be deleted, for fear someone may just read the 1st few post. Your accountant is so very very wrong on the basics. I fear for you if you listen to his advice on a much more advanced topic, like taxes after selling a rental (recapture, capital gains, etc). Hopefully you just misunderstood what he said and he has been doing your taxes correctly. There is no standard deduction, or option not to itemize on schedule e.

Every property you own should be on schedule e; the net gain/loss is what is going against your income. You need a new tax advisor. 

I'm always a bit reluctant to wade into discussions about other CPAs because I do not know all the facts, but based solely on what you entered in your original post, your accountant is wrong. But, there could be other reasons you cannot take the rental loss (primarily passive activity or basis limitations), so you might want to question your CPA more. Perhaps the two of you are miscommunicating.

Expenses related directly to the rentals are deducted on schedule E--not as itemized deductions on schedule A. Usually, properties on schedule E that are rentals are passive income. With some exceptions (like publicly traded partnerships), all of your passive income is netted. If the net result is a loss, your net loss will have to be carried forward to next year. As mentioned by @Thomas DeVoe (Thomas, I went to Homewood a lot when I was a child into early 20's--loved that area), you may be able to deduct up to $25,000 of passive activity losses IF you actively participate in the rental properties and your Adjusted Gross Income is not too high.

I cannot think of a situation where you BOTH cannot deduct the losses this year AND you cannot carry them over either.

Another possibility: your CPA does not agree that you have rental properties but rather that the properties are personal (ie, second, third, etc. homes). If he is trying to deduct the property taxes on schedule A (which would be correct in this case), and the standard deduction is more than your itemized deductions (of which, in this case, the property taxes would be one), you would use the standard deduction instead of your actual deductions.

Sorry I got so long-winded here--I feel like this is basic knowledge for a CPA and there must be a miscommunication between the two of you.

@Joel Trout  

This is so basic and it is difficult to believe that a certified accountant will give such an advice. Which means that you and your accountant are probably talking past each other i.e. miscommunication. 

On the other hand, have you asked your accountant to show proof of certification?

I think the problem was resolved.  The accountant saw the deduction for the second property on my Schedule F in for prior years,  so he didn't know to put it on the schedule E now that I'm renting out the property.  (Seems obvious to me) but I re-explained to him over email that it should go on the Schedule E, and it seems like he just didn't understand that it was converted from farm property to investment property. I explained over the phone,  but something just didn't connect until I wrote out line by line what the Schedule E should say. So basically I had to do his job before he understood what he was suppose to do.