Deducting previous year's depreciation expenses on rental property

Forum|Forum|6 years ago
March 3, 2020
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There's a place in Turbo Tax asking for non-deductible expenses from prior years for my rental property. I noticed that the full amount of this year's depreciation expense was reduced by about $1000 on my taxes because the full depreciation amount plus other expenses was greater than my rental income. In other words, it appears that rental income minus expenses can't be negative (show loss) so Turbo Tax reduced the depreciation amount to make them even (income - expenses = $0). Does that mean I will be able to deduct that $1000 next year as expense I was not able to deduct this year?

ColeenD3

There are income limitations. Passive losses are entered on Form 8582. The amounts are not lost. They can be recouped at the time of sale.

Maximum special allowance. The maximum special allowance is:

$25,000 for single individuals and married individuals filing a joint return for the tax year,
$12,500 for married individuals who file separate returns for the tax year and lived apart from their spouses at all times during the tax year, and
$25,000 for a qualifying estate reduced by the special allowance for which the surviving spouse qualified.

If your modified adjusted gross income (MAGI) is $100,000 or less ($50,000 or less if married filing separately), you can deduct your loss up to the amount specified above. If your MAGI is more than $100,000 (more than $50,000 if married filing separately), your special allowance is limited to 50% of the difference between $150,000 ($75,000 if married filing separately) and your MAGI.

Generally, if your MAGI is $150,000 or more ($75,000 or more if you are married filing separately), there is no special allowance.

whoppmeyer

I am asked to enter nondeductible expense from prior years for rental property. What is this? Is it the amounts not allowed based on the ratio of personal use to fair market or is it the amount of any loss listed on Schedule E lines 21 not allowed.

Carl11_2

Employee

For the most part, it is not common for residential rental real estate to operate at a taxable profit. It's just not common at all. Especially if you have a mortgage on the property. When you add up the allowed deductions of mortgage interest, property insurance and property taxes, then add that to the depreciation you are required to take each year, more than likely those deductions will be more than your total rental income received for the year. Add to that the other allowed rental expenses you're allowed to deduct (repair expenses, maintenance expense, etc.) and you're practically guaranteed to operate at a loss "on paper" every year, at tax filing time.

Once your rental deductions gets your taxable rental income to zero, that's it. You can't deduct any more. Those excess deductions that you could not take, just get carried over to the next year. So with each passing year the amount of "carry over losses" just continues to grow. You can't actually use and "realize" those losses, until the tax year you sell the property.

Now there is a fairly new change to the law that says if you meet certain criteria, then once your rental deductions gets your taxable rental income to zero, of the unused deduction amount remaining, you can deduct a maximum of $25K from your "other" ordinary income - such as your W-2 income. One of the criteria to qualify for this, is that you must be "actively involved" in the management of that property. For those that own say, 1 to 3 rental properties, they very well may be actively involved. However, if you hired someone, such as a rental management company to manage the property for you, then you may not necessarily be considered as "actively involved" in the management of the property.

Any carry over losses you have from 2019 that get carried over to 2020, will be shown on IRS Form 8582 from the 2019 tax return.