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  • Dennis C. Carroll, Esq.

How much can I offset my income with rental losses?

Updated: Aug 30, 2023


By rental losses, I mean that your rental expenses (after allocating between rental and personal expenses) exceed your rental income.


You can offset all of your rental losses against your other income, if you are considered a real estate professional (defined later), you have participated materially (defined later), and your personal days at the property were less than the greater of 14 days or 10% of rental days.


You can offset up to $25,000 of rental losses against your other income, if you actively participated (defined later), your personal days were less than the greater of 14 days or 10% of rental days, and your adjusted gross income was less than $150,000.


You can offset some of your rental losses against your other income, if your personal days were more than the greater of 14 days or 10% of rental days. The fully deductible rental expenses here include the rental portion of mortgage interest, real estate taxes, rental agency fees, and advertising. The remaining rental portion of your rental expenses will be carried forward to next year.


Rental circumstances outside of the above paragraphs will result in all rental losses being carried forward to next year. When the rental property is finally sold, all unused rental losses can be deducted.


Real Estate Professional = More than 750 hours of your services during a tax year and more than 50% of your services performed in all/any business during a tax year were for a real estate business (defined below) in which you materially participated.

Real Estate Business = Real estate re/development, re/construction, acquisition,

rental/leasing, operation, management, and brokerage.


Material Participation = Any of the following may be satisfied to fulfill this test:

1 - more than 500 hours of your yearly services were for the relevant activity

2 - your participation was substantially all of any participation in the activity

3 - more than 100 hours of your services were for the relevant activity and

no one worked more than you on the activity

4 - more than 100 hours of your services were for the relevant activity and

you worked a total of 500 hours for other activities where you also worked more

than 100 hours

5 - you met 1 of the other 6 tests for material participation for 5 of the last 10 years

6 - you materially participated in this personal service activity for any of the last 3

years [personal service as opposed to income generated from capital holdings]

7 - your participation was regular, continuous, and substantial based on facts and

circumstances


Active Participation = You (and your spouse together) have at least 10% ownership in the property, and you make management decisions like approving new tenants, deciding on rental terms, approving and arranging rental expenditures. You must have more control than just the ability to hire, fire, and approve decisions made by the actual property manager.

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