Huddleston Tax Weekly

Rental losses for real estate activities are generally considered passive activities and the amount of loss you can deduct is limited.  You can usually deduct more of a loss if you “actively” participate in your rental activity.  Active participation is if you own at least 10% of the rental property and you made management decisions in a significant sense.

If your rental losses are less than $25,000 and you actively participated in the rental activity then the passive activity limits do not apply to you.

If your rental losses are more than $25,000 and you actively participated then your loss is limited to the $25,000 unless you have other passive income to offset the loss.

If you do not actively participate then any loss is deductable only to the extent that you have other passive income.

Any suspended losses due to the limits on passive activity will be released when the property is sold.  Also, there is an income phase out for the $25,000 deduction limitation.  If your modified AGI is $100,000 or less, then no limits apply.  If your modified AGI is between $100,000 and $150,000 then this loss is limited to 50% of the difference between $150,000 and your modified AGI.  If your modified AGI is more than $150,000 your cannot generally use the special allowance.

Rental loss deductions can be complicated.  Make sure to contact your tax advisor to make sure you are making the most of your rental losses.

Depreciation is used for items that cannont be fully expensed in the year they were paid for.  For a rental property this would include items such as the building, appliances, furniture, and improvements. 

Property that should be depreciated meets the following requirements:

1. You own the property
2. You use the property in your rental
3. The property has a dterminable useful life
4. The property is expected to last more than 1 year
5. The property is not excepted property (such as property placed in service and disposed of in the same year)

For rentals, the following are examples of depreciable property and their useful lives:

• Building - 27.5 years
• Appliances - 5 years
• Carpets - 5 years
• Furniture - 7 years
• Fences - 15 years
• Additions and improvements - 27.5 years

When you start to rent a residential home, part of the cost basis of the home must be allocated to land.  Land is not a depreciable item.  You can figure the portion of the building cost attributable to land by using proprety tax records or a professional appraisal.

If questions arise about whether or not a rental item should be expenses or depreciated for tax purposes it is always best to consult a tax professional.  This way you can make sure your tax return is correct.

If you rent out only part of a property you need to be sure to account correctly for the expenses.  If you rent only part of a property then you must divide the expenses between personal and rental use.  You can deduct the rental portion of the expenses on Schedule E of your 1040 and the personal expenses (such as mortgage interest and property taxes) on the Schedule A of your 1040.  If you have any expenses that belong only to the rental portion of the building, then these do not need to be divided.

For example, if you have an apartment attached to your home that you rent out then you must divide expenses such as mortgage interest and property taxes between the part of the home you live in and the part that is rented out.  You can do this based on the square footage of the total house and the part you rent out.  You must also divide expenses like homeowners insurance and utilities between the rental and non-rental portion.  The non-rental portion of the insurance and utilities is not deductible on your tax return, but the rental portion is deductible as a rental expense on Schedule E of your 1040.  If you have something like a phone line running only to the rental then this expense in fully deductible as a rental expense since it is not being used by the rest of the home.

If you have any questions about what is deductible as part of your rental and what expenses need to be divided then it is best to consult a tax professional.