Expenses of rental properties increase the amount of tax owed

Forum|Forum|7 years ago
June 6, 2019
4 replies
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I asked this question before but it got archived/deleted due to my inactivity on this site. I hope that I can get it answered (again) this time.

I have 2 rental properties. Both were rented for the entire 2018. Why does the amount of Federal tax owed increase when I add more expense deduction? There seems to be a "sweet spot" where I can get the lowest tax. If I increase or decrease the expenses, my Federal tax would go up.

TurboTax Premier Online

Carl11_2

Employee

Are you sure it's a "refund" amount going down? Confirm that it is "in fact" no5 the amount you owe to the IRS that is going down.

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avidinvestorAuthor

Employee

It's the amount I owe (not refund) in Federal tax.

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Anita01

Employee

Adding expenses lowers your Adjusted Gross Income. There may be credits or deductions on your return that decrease as your AGI goes down. For example, you need a certain amount of income to qualify for some credits. As your AGI goes down, you may no longer qualify for that credit. Keep in mind that lowering your expenses to allow for a bigger Eared Income Credit is not allowed.

People often don't realize that every entry causes an entire recalculation of your tax return and can often cause unexpected results. The only way to tell what is really happening is to look at and, preferably, to print your 1040 before and after you enter a number.

You can look at your 1040 by clicking on Tax Tools on the left, then Tools. Select View My Tax Summary, then Preview My 1040.

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avidinvestorAuthor

Employee

Thank you. I'll preview the 1040 and do the comparison.

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Anonymous

It's probably because of the Qualified Business Income (QBI) deduction. You probably have carry-forward passive losses on your rentals. If you don't list rental expenses, the profit on your rentals increases, but you don't owe tax on these profits because of the carry-forward. Then you would get a QBI deduction of 20% of those profits. As you add expenses, the profit decreases, and the QBI deduction goes down, thus raising your taxes.

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bgauvin

Thank you for this response. This is what happened on my 2020 return after Turbo Tax neglected to carry forward my rental property asset. I am glad they sent me an email, but I am not happy I just spent 2 hours wondering why adding more depreciation caused my refund to go DOWN. Thank you!