John M. Hoffman & Associates CPAs

Frequently Asked Tax Questions

Rental Property

Passive Loss Rules and Rental Property:

In all cases, the net profit (loss) from rental activity is rental income (loss). Rental income (loss) is not income subject to self employment social security type taxes. Rental income (loss) is not considered investment income. Rental income (loss) is considered passive income (loss).

Deductions for losses from passive activities (rental losses for example) are limited as to their deductibility.

In simple terms:

The passive loss rule generally do not apply to people who work in the real estate business. These taxpayers are known as real estate professionals. There are certain rules and criteria for being a real estate tax professional. 

To protect the two family home there is a special rule that allows up to $25,000 of passive rental losses from rental properties where the taxpayer is actively involved in the management of the rental property to be deducted. This special allowance is phased out for taxpayers with income between $100,000 and $150,000. 

Losses that are not currently deducted are “suspended”. Suspended losses are deductible as an offset to passive activity gains. Suspended losses are also deductible when the activity (property) that generated the passive loss is disposed of. Having a property that generates passive income (rental for example) allows losses from another passive activity (rental for example) to be deducted (against the property that makes money).