By Jason Watson (Google+)
Ok- let’s presume that you have a rental loss. How does it affect your tax return? Rental income is typically considered passive, meaning that you are not directly earning the income as you would with a job. Passive losses may be deducted from non-passive income such as wages, but there are limits. Passive loss limits for married taxpayers max out at $25,000, and that number decreases as your gross income increases.
Specifically, passive loss reduces $1 for every $2 over $100,000 adjusted gross income and by $150,000 (for married couples) the passive loss deduction is $0. Bummer. Not all is lost however. If your rental losses are capped or disallowed because of passive loss limits, the portion exceeding the passive loss limit is carried forward, aggregated for each year and may be deducted in the year of disposal (sale).
Passive loss limits for single filers or for married persons who live apart for the entire tax year is $12,500. If you live with your spouse for any part of the year yet file a married, filing separate tax return the passive loss limit is $0. Not good.
There is another angle to all this- if you are a real estate professional and you materially participate, you can claim 100% of your losses and you are not capped by passive loss limits. This makes sense since your rental income is no longer passive if it is your livelihood or at least a large portion of your livelihood.