Eric Sheldon CPA, PC

What are passive real estate income losses and expenses?

If you own a rental property and incurred a loss during the year, you may be able to deduct your loss as an expense, known as depreciation tax write-offs. They allow you to write off the cost of the subject property over a predetermined period of time. In essence, these losses are business expenses.

 

Passive income can be earned in many ways. One way to generate passive income is to invest in rental property. This way, you can benefit from tax-free rental income without incurring additional expenses. This type of passive income can also be used as a way to offset ordinary income from trades or businesses. The IRS allows a passive activity deduction of up to $25,000 of expenses.

 

In addition to passive income, passive activity expenses can be written off against your income if you are a qualified real estate professional. In order to qualify, you must have 750 hours of rental activities each year and be a material participant. The other key requirement is that you must devote at least 50 percent of your time to the real estate business.

 

When you have a loss from passive activities, you must claim it as a deduction on your federal Form 8582. The amount of loss you can deduct is based on your total passive activities. This form is required by individual taxpayers, estates, trusts, closely held C corporations, and personal service corporations. If you do not have a net loss, you do not need to file this form.

 

You can deduct your losses only up to the amount of passive activity income you have. Any excess losses can be carried forward to the next tax year and offset against other passive activity income. However, if you earn more than you lose, you must apply the rules of the passive activity tax deduction.

 

How to Offset Losses

Real estate investing can be an excellent way to offset other investments and offset your losses. Real estate investing can also tap into suspended passive income losses and expenses. It can provide you with a significant tax benefit. However, the key is to focus on low appreciation and high cash flow markets. In addition, passive income losses can help you save on property taxes.

 

When you sell a passive interest property, you can use the proceeds to offset the tax on the property. If you sell the property to a related party, you can also deduct the loss as a non-taxable expense. If you sell the property, you can use your suspended passive loss against the gain in a later year.

 

Another exception to the passive activity definition is holding a working interest in an oil or gas property. This interest can be held directly or through a separate entity. If you participate materially in the business, you can deduct your gain as a non-passive activity. In contrast, if you do not participate in the oil and gas business, the activity is considered to be passive.

 

This is a complicated tax topic. Speak with us before completing your tax forms to ensure you maximize your deductions.

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About the Author

Eric Sheldon

Eric Sheldon

Eric Sheldon is a certified public accountant with more than 25 years of experience in a wide variety of industries. He's the owner/operator of Eric Sheldon CPA, PC, an accounting firm that specializes in providing tax strategy and preparation, accounting, and bookkeeping services to individuals and small business owners.

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