Kelly Bullis
A long time ago, it was a really great thing to own real estate rentals and get to deduct all the related tax losses (after taking depreciation expense) against other income. Then the socialists and wealth-haters in Congress got their way and restricted taking rental losses to a maximum of $25,000 and only if their Modified Adjusted Gross Income (MAGI) was $100,000 or less.
Over that amount, it is phased out and is gone at $150,000. (Any amount of your annual rental losses that are not allowed, IRS likes to call those “Passive Loss Carryovers.” They become usable in a future year or are added to the basis of the property when it is sold.)
Notice here that Congress makes no distinction between married or single filers? Totally unfair to married folks. Two single folks could each have $100,000 in MAGI and get the full rental loss deduction, but if they got married, now having $200,000 in MAGI, they get ZERO rental loss deduction.
So, there is a way around having your rental losses limited. It’s called being a “Real Estate Professional.” The good news is that you do NOT have to have a Real Estate license to qualify. Instead, there are two simple time methods that can be used.
The first method has two requirements and they both must be met. 1) More than half of the personal services you perform during the tax year are performed in real property trades or businesses in which you materially participate. 2) You spend more than 750 hours on real property trades or businesses in which you materially participate.
But wait, there’s another way! If you choose to aggregate all your rental properties into one activity and work 500 or more hours in that “one activity” per year, you can qualify as a Real Estate Professional, allowing you to deduct all the rental losses. It is important that your participation in the “one activity” is one individual, not combined for a couple. And it was your main or only activity for the entire year. That you participated in this “one activity” on a regular, continuous, and substantial basis during the year.
For both methods, if one spouse when filing “Married Filing Joint” qualifies, both spouses benefit on their joint return.
In either case, it is VERY important to keep a detailed log of your time. No just “making it up” later. You should have a method of recording your time daily or at least weekly. Give some description of what you did, where you were, not just putting hours spent down.
Have you heard? Prov 9:6 says, “Leave your simple ways, and live. Walk in the way of understanding.”
Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 882-4459. On the web at BullisAndCo.com. Also on Facebook.