How To Claim Rental Losses on U.S. Tax Forms

Income from rental properties is classified by the IRS as passive income. Passive income is defined as “earnings an individual derives from a rental property in which he is not actively involved”.

If you are a landlord, you know that once in a while you need to make major repairs on our rental property. Sometimes this will amount to more than $25,000.

  1. You can claim a total rental loss of $25,000 which covers all the rental properties that you own and not individually. This is the limit set by the IRS as stated in the Passive Activity Loss ruling.
  2. If you rent your home as an additional income source, you will use Schedule E of Form 1040 to report rental losses you have incurred for the year. This is the Supplemental Income and Loss form. You are allowed to list three properties in Part I of the form. You have to itemize all the expenses you have incurred for the year in lines 5 to 18. There are three columns (A, B and C) provided here to itemize all expenses incurred for each of the allowed three properties. Include depreciation expense on line 20. Add up all the sub-totals to arrive at the grand total. Subtract line 21, columns A. B and C which is the total of all the expenses plus depreciation costs from line 3 columns A, B and C which is the total amount of rent you have received to arrive at your loss or your income which should be entered in line 22.
  3. Your rental loss as reflected in line 22 may be limited. If this is the case, you may have to fill up Form 8582, which is the Passive Income Loss Limitation. This is used by non-corporate taxpayers to determine the amount of allowable rental loss deductions. You have to complete worksheets 1, 2 and 3 first before you can begin filling up Part I of the form. You have to enter your net income, your net loss and the unallowed loss. You also need to enter the overall gain or loss in worksheet 1. For worksheet 2, you have to declare the deductions for the current year, the unallowed deductions from the previous year and the overall loss. In worksheet 3 you will enter the net income and the net loss for the current year, the unallowed loss for the previous years and then the overall gain or loss.
  4. If your rental loss deduction is over the set limit of $25,000, you remaining balance can be carried over to the following tax year.
  5. If you are involved in real estate investment business, your losses as well as your gains should be reported in Schedule C or C-EZ of Form 1040.
  6. If you are married and have participated actively in the passive income and you file your income tax return jointly then you can claim the total $25,000 that is allowed. If you file separate income tax returns, then you have to split the total amount into two.

There are specific instructions on rental activities that you have to look into when you want to file a claim for losses on rental properties on your U.S. tax forms. If can be confusing and time consuming. The best thing you can do is to consult with a tax professional or have your accountant do the paper work for you. The legalities of these tax deductions are very intricate and encompassing and you may miss out something vital that can void your claim.


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