By: Bostonian In MO

Bostonian In MO — Sun, 22 Nov 2009 01:57:40 +0000

if you are claiming a rental, it is always passive income
if you are in the business of renting that is another matter
but passive losses are limited and that amount is $25,000 which if you have a good computer program which you can carry forward each year, keeps the record of your passive losses which may be recovered when you sell it(but don’t count on it)
if you did not participate you are more than like in some kind of rental partnership and that would be reported another way

By: Bostonian In MO

Bostonian In MO — Sat, 21 Nov 2009 21:45:17 +0000

You can deduct passive losses up to the amount of passive income without limitation and once that’s exhausted, against other income up to $25,000 per year.
In Tom’s case, his passive income is $0 so he can deduct $25,000 in passive losses against other income. The remaining $5,000 is carried forward to the next tax year where he uses it against any passive income next year and then in $25,000 chunks each year. If there are any remaining passive losses when he sells the property he uses them to adjust his basis in the property when calculating his capital gain or loss on the sale.
Edit: If the owner does not actively participate then the passive activity loss limitation is $0 and it all gets carried forward if there is no other passive income. The IRS is pretty lenient on what constitutes “active participation” however so pretty much all landlords qualify. Even if you use a property manager for the day-to-day management, as long as you reserve the final say on all tenants, major expenditures and any other major decisions then you’ll meet the active participation standard.
There’s another “gotcha” with passive losses. You also have to meet the “at risk” rules. You have to have a financial stake in the property to meet the at risk rules. A financial stake would include any down payment made as well as the liability for any shortfall in a mortgage upon foreclosure or the risk of loss of your investment to fire or other catastrophe. Having insurance against those contingencies does not wipe out your at risk position. Unless they acquired the property by gift or bequest most taxpayers meet the at risk rules.

Comments on: Question About Passive Income Tax Please!?

By: Bostonian In MO

By: Bostonian In MO