special allowance of residential rental passive loss deduction. Can I deduct less that maximum allowed ?

Forum|Forum|5 years ago
October 1, 2020
2 replies
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If I qualify for special allowance of residential rental loss deduction (entered in line 22 of Schedule E for year 2019), do I have to take maximum allowable deduction (i.e. $25000 for joint return), or can I adjust/lower that deduction, since beyond certain, much smaller amount, there is no tax advantage for me - tax due stays zero (I have very low income). I would carry not claimed portion to the next year.

I have read number of IRS publications, including 527, 925, and none of them states clearly that I have to take a full/max amount if allowed and available. IRS says: "up to $25000" for married filling joint returns. "up to" to me means $0 to $25000 .

Rental Property

M-MTax

Yeah but by 'up to' they're talking about the phaseout rule for AGI and not the flexibility to take as much as you want or need. You have to take as much as is allowed and there is no carry over to next year.

Critter-3

If the passive loss creates an NOL then that can be carried forward.

Carl11_2

Employee

This is just "rough" and I'm not going to get into the details of marital status, filing status, and income thresholds. But generally:

If you have $25,000 loss on rental property *after* getting your taxable passive income to zero, that remaining $25K can be claimed/deducted from other ordinary taxable income. However, if that "other" income is say, $20K, then you can only deduct $20K bringing your total tax liability for the year to zero. The remaining $5K of loss is carried forward as a passive loss carry over. You can't decide to take a lower deduction against your other ordinary income. The rules don't allow for that. Just because the rules don't address it directly, doesn't make it legal.

However, if you want to do that then by all means go ahead. More than likely you'll end up in tax court in about 3-5 years over it. Then it would be very interesting (as well as definitive) to see how the tax court rules. Once there's either a clarification of the existing rules, or a decision handed down by a federal tax court, that will end any and all discussion on this and settle the matter once and for all.

Critter-3

To sum things up ... NO you cannot choose to ignore or change the amounts calculated by the program on the IRS forms per the IRS instructions HOWEVER the unused loss is NOT lost just carried over until it can be used. Please trust the program and review the forms prior to filing to see how all this is handled.

M-MTax

Sorry but this is WRONG! The unused part of the $25,000 special allowance IS NOT CARRIED OVER! The example provided by Carl is WRONG. If your total SCH E loss is $20,000 then ONLY $20,000 of the special allowance is used and you CAN'T CARRY OVER THE REMAINING UNUSED $5,000. Read the Code!!!!!!