Another Active Loss Limit Question
I think I have this figured out, but I want to post my scenario and get opinions.
My wife and I have W2 incomes of $155K combine, so losses on our rental properties are suspended.
I recently purchased a lake home that I intended offer for short or long term rentals. I have the demand to do either...both would produce paper looses because of the price of lake property relative to the market rate for rent. My main reason for buying it is for the anticipated appreciation and the fact that I can offset some of my expenses with rental income. Offering it for short-term rentals would generate more in rent but also in expense and work. The long term rent scenario would generate significantly less rent and expense. I feel that there is no financial incentive to do one (short-term rental) over the other (long-term rental).
However, if I do the short-term rentals...this would be classified as a business. This business would show a loss and reduce my AGI below the $150K threshold. This would mean that my renal losses on my other properties could be used now to offset some of our W2 income.
Is my analysis of this fair? If so, it seems like a no-brainer to me...I will go with the short-term rentals and classify this as a business.
As an aside note...I know about the $25K loss limit and I actively participate in all of my rental activities.
Thanks for the replies. Yes, my objective is to reduce my AGI (probably by about $20K) by reporting my short-term cabin rental as a business loss. This way, my AGI will be low enough to allow me to take advantage of some of the active participation losses from my standard long-term rental properties (apartments).
My long-term rental properties will start to show a profit as my interest expenses are diminished. However, if I continue to keep purchasing new ones, I believe my portfolio will continue to show minor losses. My rental cabin, on the other hand, will never show a profit. The market rent, when compared to lake shore prices, is too large of a spread. However, I purchased this property because I anticipate that it will double in value in just a few years.
I asked my accountant about this scenario. She said she did not know but would research it and get back to me. Hopefully, she will come to the same conclusion that we have on this forum. While I like my accountant, she readily admits that she does not have very much experience in this arena. I may write a separate post asking for a good Mn RE CPA…it maybe time for me to upgrade.
[ Edited by jasons on Date 02/24/2006 ]