Can I Deduct Rental Losses In 2018?
3 min read
The Basics of Rental Loss Deductions
As a landlord, it’s important to understand the tax implications of your rental property. One common question that arises is whether or not you can deduct rental losses in 2018. The short answer is yes, but there are certain rules and limitations that you need to be aware of.
Active vs. Passive Losses
When it comes to deducting rental losses, it’s important to differentiate between active and passive losses. Active losses are losses that you can deduct against your other income, such as your salary or business profits. Passive losses, on the other hand, can only be deducted against passive income.
In general, rental losses are considered passive losses. This means that you can only deduct them against passive income, such as rental income from other properties or income from a partnership or S corporation. If your rental losses exceed your passive income, you can carry them forward to future years and deduct them against future passive income.
Active Participation Exception
There is an exception to the passive loss rule known as the active participation exception. If you actively participate in the management of your rental property, you may be able to deduct up to $25,000 of rental losses against your other income. However, this exception is subject to certain income limitations.
Income Limitations
In order to take advantage of the active participation exception, your modified adjusted gross income (MAGI) must be below certain limits. For single filers, the limit is $100,000. For married individuals filing jointly, the limit is $150,000. If your MAGI exceeds these limits, the amount of rental losses you can deduct gradually phases out.
For every $2 that your MAGI exceeds the limit, your allowable rental loss deduction is reduced by $1. Once your MAGI exceeds $150,000 (or $100,000 for single filers), you can no longer deduct rental losses against your other income.
Real Estate Professionals
If you qualify as a real estate professional, you may be able to deduct rental losses without any income limitations. To qualify as a real estate professional, you must meet two criteria:
- You must spend more than 50% of your working hours and at least 750 hours per year in real estate activities.
- Your real estate activities must be more than the combined hours spent in all other trades or businesses.
If you meet these criteria, you can deduct your rental losses against your other income, regardless of your MAGI.
Tax Planning Strategies
If you are unable to deduct rental losses in the current year due to income limitations, there are several tax planning strategies you can consider. One option is to defer rental income to a future year by delaying rent payments or offering rent concessions. By doing so, you can increase your passive income in a future year and offset it with your rental losses.
Another strategy is to convert your rental property into a vacation home or personal residence. By doing so, you may be able to deduct rental losses against your other income as long as you meet the requirements for deducting mortgage interest and property taxes on a second home.
Consult a Tax Professional
The tax rules surrounding rental losses can be complex, and it’s important to consult with a tax professional who specializes in real estate taxation. They can help you navigate the rules and ensure that you are maximizing your rental loss deductions while staying in compliance with the tax laws.
In conclusion, while you can deduct rental losses in 2018, there are certain rules and limitations that you need to be aware of. Understanding the difference between active and passive losses, as well as the income limitations and exceptions, is crucial for optimizing your rental loss deductions. By consulting with a tax professional and exploring tax planning strategies, you can ensure that you are making the most of your rental property tax benefits.