Tax write off for Rental Losses

[tmatsus]

I have a rental and I would like to write off losses that I had from previous years. Can I do that?

My CPA suggested I should get a Realtor license and I would be able to write off previous years losses. Can someone comment on this? Thanks in advance.

[JohnWoodward]

I'm not sure why your CPA didn't advise you about how to handle the losses when he/she suggested getting a "Realtor license." Sounds like a sham to me but what do I know. There is no such thing as a "realtor license." There is a real estate license and then if you join a firm who ascribes to the REALTOR code of ethics, then you become a member of the REALTOR community...of course, there are dues, fees and a lot of classroom time to get there.

[Eric Lorimore]

Normally these are taken each year as you report your rental income. ie: your gross rental income minus expenses, so it's automatic that your losses are taken annually.

If for some reason you have not been doing this, you can recapture when you sell ie: subtracting all your losses including depreciation from your gross profit at time of sale.

Perhaps your CPA was suggesting you become licensed so you could more easily qualify as a real estate professional. This is a narrow category that allows people making over $150,000 to claim losses in excess of $25,000 per year annually by documenting 750 hours per year involvement with their real estate investments. (see IRS website for more specific details)

Please feel free to contact me if you have any more questions in this regard.

Hope this helps.

[Eric Lorimore]

Re: Passive vs. Active rental real estate activity. If you actively participate in the management of your property ie: participate in determining rental amounts, approve repair amounts, make occasional visits to to property to determine condition, etc. You can write off losses from your rental to off set income from other sources using the schedule "E" form. A knowlegeable CPA can and will use these deductions to offset your income from other sources. You must however be able to demonstrate some active participation in the management of the property. This is most easily done by stating in the lease you must approve all repairs. Another way is to have as part of your property management agreement, the final right of approval of the perspective tenant and rental amount.

Hope this clarification helps

[Eric Lorimore]

The tax write off for your rental is usually handled on the schedule "E" where you report income from the rental unit each year. The income is offset by your expenses on that form. The primary deductions are normally interest, depreciation and any repairs. If for some reason you have not been taking these deductions, you have 2 choices: You can file a 1040 X (an amended tax return for each year) or continue to carry these expenses forward until you sell the property and take them as an expense subtracted from your profit to reduce your capital gains tax. Your best guidance in this area will come from a CPA knowledgeable in real estate tax law. The good news is the deductions are not lost, but may be postponed.

[Eric Lorimore]

Sue & Steve and other interested parties:

First I would recommend as first time landlords, you consider hiring a well established Property Management company. It will save you a lot of headaches. Proper screening and a well drafted lease agreement will make all the difference. It is tempting to save the 10% monthly fee, but not recommended for 1st. time landlords. I do agree that it will be in your best financial interest to hold on to it for 5 to 7 years to allow the value to go back up. (since we are at the bottom of the market presently)
Part 2 of your question is yes, you should report the income on IRS form 1040 E. That same form will then allow you to deduct expenses such as getting it rent ready, interest and depreciation allowance. A good CPA will be well worth the money to guide you to the maximum legal deductions.

So the 2 recommended contacts would be quality property management and a CPA versed in rental income property.

Feel free to reply with any additional questions.