There may be losses that are associated with any type of business but when you are involved in real estate, there may be passive activity losses that need to be considered. Passive activity that is associated with rental activity is possible because in many cases, the owner of the rental real estate does not materially participate in the rental activity. On the other hand, non-passive activities would be any type of business in which the taxpayer would work on a substantial, continuous basis. Passive income does not include anything from your portfolio, salaries or investment income.
If you do own rental property and are not materially participating in the property, you may be able to claim passive income losses on your income tax. Although that is true in almost all cases, there are some passive activity loss limitations which also need to be considered. In this article, we are going to take a look at some of those limitations which may or may not apply in your particular case.
Limited Customer Use - When the rental property is used for a period of seven days or less, the activity will not be considered as rental activity. It may be necessary for you to calculate the average period of customer use to determine if you can claim passive activity losses on your income tax.
Limited Customer Use with Services - If the individual who is renting your property does so for a period of 30 days or less and you also provide personal services of a significant nature during that time, you may not be able to claim passive activity losses on your taxes as well. The specific circumstances of the rental need to be taken into consideration to determine if the services were truly significant. In turn, those significant services would not include anything which would be necessary for the lawful use of the property, any services to improve or repair the property for much longer than the average rental and any services which would not typically be part of a long-term rental, such as common area maintenance or cleaning.
Non-Rental Activity - If the primary reason why the property owner is holding the property is to see gain from the appreciation of it, passive activity losses may also not be able to be claimed on their taxes. It is necessary to consider the amount of the rental income in comparison with the fair market value of the property.
Extraordinary Personal Services - If services are performed to make the rental property available for use by the customer and the use of the property by the customer is incidental to those services, passive activity losses may also not be able to be claimed.
There may also be limitations as to any losses that are able to be claimed from the property. For example, there is a special $25,000 allowance, which allows you to deduct up to that much from your non-passive income, but certain situations need to be met in order for that allowance to be permitted. In addition, there may be limitations as to your filing status if you are married and filing separately or if you lived apart from your spouse for the entire tax year.
Higher income individuals sometimes obtain a rental property with the expectation of being able to deduct up to the $25,000 in losses only to find that they are not eligible because they have phased out of that deduction all together. Tax Force Inc employs several strategies which allow you to realize these losses even as a high earner.
Passive activity losses can be difficult to understand, but you can count on Tax Force Inc to provide you with the assistance that you need to file your taxes properly. You can contact us today for more information about the services that we provide.