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Can You Deduct Rental Property Losses?

March 07, 2012

Rental properties are usually treated as passive income. This means that the IRS has specific tax guidelines and requirements that must be followed to have the opportunity to deduct losses on passive income investments. Since a Florida investment property can incur losses, you may qualify as a real estate investor to offset losses against the income that you have generated from a rental property. Learning what the qualifications are will help you determine if rental property losses can be deducted for the taxable year. Whether you have one property or several properties, losses are one of the things you must deal with as a real estate investor. 

Active Participation Qualification for Real Estate Investors

The IRS has created several qualification tests for use to determine if a person or entity will be able to deduct rental property losses. The strict testing is used to prevent every rental property from claiming losses during every year of ownership. The ability to write off losses is a privilege and not a right when you own or co-own a rental property or vacation home. The rules for individuals to determine if they qualify for active participation are as follows:

• Own at least 10% of the Property

• Participate in Limited Management Decisions

• 100 Hours of Participation Annually

• Identify Sources of Particpation Annually

• Analysis and Study of Financial Statements

• Creation of Financial Statements

The average real estate investor should not have an issue qualifying for active participation to deduct losses on rental properties. If more than one owner is involved, each person will have to meet the same guidelines if he or she will be deducting ownership portions of rental property losses. Special considerations are made for disabled persons or retired persons that may not qualify for in-person and day-to-day activities. The IRS publication 8582 explains additional details about qualifications of active particiapation. 

Special Allowances for Deducting Rental Property Losses

Qualified individuals may be eligible to receive a $25,000 maximum deduction allowance when preparing an annual tax return. A loss of this magnitude would be for a real estate investor that owns multiple properties that have experienced enormous annual losses. This amount is reduced to $12,500 for people that are married and choose to file separate tax returns. The following income criteria must be met to take advantage of the special allowance deduction:

• Less Than $100,000

• Less Than $50,000 If Married Filing Separately

Annual income that exceeds $100,000 may be subject to a 50% reduction of the special allowance. Additional factors that might be used to determine your elgibility can include a property appreciation of more than 120% during a taxable year. It is good practice to hire a certified public accountant or other tax professional when determing your eligiblity for any rental property losses when planning to use special allowances. 

By Gregg Cohen

I am a co-founder at JWB Real Estate Capital, and I love to talk about investing in rental properties! You’ll often find me here contributing to our blog and in our Facebook group connecting with the community & sharing insights.

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