Deducting Rental Income Losses

Real Estate Passive Activity Loss Rules - Deducting Rental Income Losses
 
  Do not use this information as a substitute for professional advice!

The Internal Revenue Service views the income from rental properties as passive income and applies special passive activity loss rules to that income. 

When purchasing income property, your occupation and role in the management of your property s one factor that will determine how much you can write off in rental losses each year on your tax return. 

If you have recently purchased an income producing property and the property will have a negative rental income, be sure to check with your accountant or legal advisor to determine if you qualify to write off rental losses.

If the income property that you are purchasing has a positive income, your occupation and role in the management of the property doesn't mater.  The positive income form the property will be taxed the same in all situations, as ordinary income.  
 
Real estate professionals can write-off all rental losses in the year of the loss on their tax return.  No rental losses are carried forward, they are written off in the year of the loss.  You must meet IRS guidelines to claim real estate professional status.  The IRS guidelines for claiming real estate professional status can be complicated depending on your situation.  Be sure to consult with your accountant or attorney to determine if you qualify to claim real estate professional status. 
 
If you own part or all of an income property and do not actively participate in the management of the property, you can not write off rental losses in the year of the loss on your tax return. When you sell the property, you can write-off all unused rental losses that have accumulated while you have owned the property.  
 
If you are an active participant and your adjusted gross income is $150,000 or more, you can not write off rental losses on your tax return in the year of the loss. 

Be sure to verify IRS guidelines if you are going to claim active participant status.

You should be aware that when you sell your income property, you can write-off any unused rental losses that have accumulated while you have owned the property.  

Please consult a professional such as a tax professional, accountant, or attorney, as the information above may have changed.

Member Posts

No topics exist.

Contribute to this page

Message Title:

Your Message Text:

Determine the Real Estate Financial Statistics for a Property

Before you buy an investment property it is critical that you create your own projection of the property's profitability. Real-Estate-Proforma.com has a quick-proforma with which you can calculate real estate financial statistics such as Internal Rate of Return, Capitalization Rate, Cash-on-Cash, Debt Multiplier, Loan-to -Value Ratio, Debt Coverage Ratio, and Mortgage Payments. You can use this JavaScript proforma to project the profitability of a real estate project. By becoming a member you will receive access to a number of Excel real estate proformas. membership | services

If you are analyzing another person's proforma, or you are examining a prospectus for a real estate deal, it is very important that you read the document carefully and determine how the values of the financial statistics above are being calculated. For instance, values such as the Cap Rate may be determined from overly optimistic projections of the future rental income of a property.

You can "reverse engineer" the financial projections you receive from a prospectus and/or request the Excel (or other type of) spreadsheet a developer used to create their proforma. A very useful Excel or Visual Basic macro used to check Excel formulas is available in the spreadsheet below for download. Download Mortgage Formula Excel Spreadsheet

The due-diligence you do on a potential investment may uncover a number of potential problems with a real estate deal and we suggest you research each real estate investment very carefully. There are a variety of real estate financial consultants who can help with this, but if you are like many Real-Estate-Proforma.com members, you can or are learning to do your own due-diligence.

We hope you become a more successful real estate investor by using this site! membership | services