25k Limit On Rental Losses
Today is tax extension day and when talking to my accountant it made me realize that I know so little about RE tax issues.
First my setup. I have a LLC setup as an S-Corp to do my buys and sells, and I have my rentals in my own name.
My accountant said that if I had over 150k gross adjusted income that I could not longer claim any rental losses. Yes that they would carry over to the next year, but my hope is not to ever make less than 150k gross adjusted income. Now I assume that rental depreciation is also included in the 25k of losses. So .... if my gross adjusted income is over 150k then I can not take any depreciation on my rentals and I can not take any rental losses? I had not heard this before.
Had always heard that you should keep your buys and sells seperate from your rentals so that you are not considered a real estate "professional", which would not allow you to take depreciation on your rentals. But if making more than 150k on your buys and sells also does not let you take depreciation on your rentals, then what is the point?
Then we were just quickly talking and my accountant said that maybe I could change the S-corp to a C-corp so that it does not flow onto my personal return. Of course there are the double taxation and other issues with an C-corp, but still it is a thought.
Guess I am looking for some general knowledge and maybe a book or course work that will help someone in my situation. I have 17 rentals and make decent money doing buys and sells. What are my options?
Brenda
Your accountant is referring to the $25K net passive income loss allowance that you are permitted to take against your other ordinary income for adjusted income up to $100K. This allowance is reduced by $1 for every $2 that your adjusted income exceeds $100K, becoming zero when your adjusted income reaches or exceeds $150K.
The net passive losses are not completely lost, however. They are suspended and carried forward to the next tax year. Even if you can use the $25K net passive loss allowance, any net passive loss that exceeds $25K is suspended and carried forward to the next tax year.
Suspended losses are first taken against your net rental income, then against other passive income activities, then against capital gains if you sell any of your rental properties. Only if you still have passive losses after all this, does the $25K net passive loss allowance enter the picture subject to the income limits.
Yes depreciation is still taken where allowable on your rental properties, and is included in your passive income and loss calculations.
You are confusing the "real estate professional" status with the tax treatments for dealer dispositions. Dealer dispositions -- your flips in your S-Corp -- are not allowed a depreciation expense, are not allowed installment sale tax treatment, are not allowed to participate in a 1031 exchange, and all your profit on the sale is taxable in the year of the sale.
Real estate professional status is available to individuals who derive an active income from a real estate business or related business in which they materially participate and in which they have an ownership interest. Real estate professionals can convert their passive losses to active losses and offset their other ordinary income without regard to the $25K cap on the passive loss allowance AND with no restriction on adjusted income.
The drawback here is that when passive losses are converted to active losses, the profit on the sale of the rental property is now active (ordinary) income. The real estate professional forfeits capital gains tax treatment.
You keep your flip property activity separate from your rental property activity so the dealer dispositions from your flips do not taint the tax treatment on any sales you may have from your rental property portfolio.
Ask your tax advisor for specific details.