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How To DEDUCT Rental Property Losses and REDUCE Taxes On other Types of Income - YouTube
Channel: Money and Life TV
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lost money on your rental property this聽
year or you expect to lose money how much聽聽
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of that loss can you deduct as a non-real estate聽?
professional and when can you deduct that loss聽聽
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that's what we're going to cover as we go through聽
this video hey what's going on everybody my name聽聽
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is mike this epa and on this channel our focus聽
is taxes and investing throughout the year many聽聽
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of you ask me questions regarding taxes in聽
real estate whether we're in tax time or聽聽
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outside of tax time and whether you are currently聽
a real estate investor or thinking of becoming聽聽
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one understanding how losses work for rentals is聽
crucial to how you operate your rental business as聽聽
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a cpa what i find in the profession is that a lot聽
of people who are new to investing in real estate聽聽
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they automatically assume that when they have a聽
loss on their rental they're gonna be able to use聽聽
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this loss to offset their other forms of income聽
income like wages interest ordinary dividends聽聽
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self-employment income and you guys get the idea聽
but that's not always how it works okay so why聽聽
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is it that you can't always use your rental loss聽
to offset your other forms of income your other聽聽
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forms of income from wages from your business聽
from interest etc that's considered ordinary聽聽
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income the irs views rental income as passive聽
income and therefore they limit how much of a聽聽
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loss of a passive loss you can use to deduct聽
against your other forms of income quick side聽聽
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note if you happen to be an actual real estate聽
professional then a lot of these loss limitations聽聽
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do not apply to you in fact rental income in that聽
case would not be treated as a passive activity聽聽
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so it's a whole different ball game if you're a聽
real estate professional but hey don't worry even聽聽
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if you're not a real estate professional which聽
most people aren't you can still deduct up to 25聽聽
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000 of a rental loss a passive loss against your聽
other forms of ordinary income but before you can聽聽
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do that you need to know there are agi limitations聽
concerning agi limitations as long as your income聽聽
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is under one hundred thousand dollars your聽
adjusted gross income you're going to be able聽聽
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to deduct the entire loss from your rental up to聽
the extent of twenty five thousand dollars however聽聽
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as your income climbs from a hundred thousand all聽
the way up to a hundred and fifty thousand once聽聽
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your income reaches a hundred and fifty thousand聽
dollars you will no longer to be able to take聽聽
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any loss against your rental and use it against聽
your other income sources think of it this way聽聽
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for every two dollars an in income that you're聽
above the 100 000 threshold you lose one dollar聽聽
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of the deduction that's why once your income's聽
at 150 000 you lose the entire 25 000 deduction聽聽
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at this point i would love to be able to tell you聽
guys hey just go on your way you know everything聽聽
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you need to know but that's not quite the case now聽
let's talk about active participation because this聽聽
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is going to be a key element in you being able to聽
deduct these rental losses when you hear the term聽聽
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active participation you probably think about聽
the days when you were in elementary school and聽聽
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tried to you had to participate in class it's聽
a little bit different than that but somewhat聽聽
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similar in a rental when they talk about active聽
participation what they're really getting at is聽聽
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do you actively manage the rental property聽
so what does that mean well for starters in聽聽
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order to actively manage the property you have to聽
own at least 10 percent or have a 10 interest in聽聽
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the rental property itself does this also mean聽
you have to be the one repairing the property聽聽
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and doing all the other management functions聽
on the property well i have some good news for聽聽
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you luckily you don't have to be great at fixing聽
things in order to manage a rental property and聽聽
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still be actively participating for example you聽
don't have to fix that leaky faucet behind me you聽聽
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don't have to be the one who mows the backyard but聽
most importantly you do not and i repeat do not聽聽
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have to be the one who fixes the water heater聽
and get a phone call in the middle of the night聽聽
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not only do you not have to do the repairs聽
yourself but even if you have a property manager聽聽
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it's fine it's totally fine it will still qualify聽
you for active participation and this helpful but聽聽
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boring article proves my point ever so nicely聽
or it says a taxpayer is considered to actively聽聽
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have participated in a rental real estate activity聽
if the taxpayer and the taxpayer's spouse if聽聽
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filing joint own at least 10 percent of the聽
rental property and you made management decisions聽聽
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in a significant modified sense management聽
decisions include approving new tenants聽聽
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deciding on rental terms approving expenditures聽
and similar decisions now that we know what the聽聽
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agi limitations are for rentals and we know what聽
active participation means in terms of rental聽聽
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management now let's go over to the tax forms real聽
quick and just see what that looks like i'm not聽聽
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going to bore you guys with the nitty gritty聽
details but i at least want to visually show聽聽
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you what it looks like on the forums and how it聽
offsets your other forms of income now as promised聽聽
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let's dive into those tax forms coming off聽
camera so you guys can see this a lot easier聽聽
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all right so this is schedule e and i'm not聽
gonna show you how to go through schedule e聽聽
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it's not that kind of a video i do have a video聽
already posted that will walk you through how to聽聽
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do this i'll leave a link to that video as a card聽
above and in the description and comment section聽聽
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below the video here so you can see in this rental聽
chipper has rents of 24 000 he has his different聽聽
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types of expenses his commissions are his cleaning聽
and maintenance his interest repairs and things聽聽
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like that so ultimately he loses two thousand聽
thirty eight dollars so he has a passive loss of聽聽
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of that amount that passive loss because he's聽
actively participating and his overall agi is聽聽
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below 100 000 he can actually deduct this entire聽
loss against his other forms of income ultimately聽聽
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you can see that loss transferred from schedule聽
e and now you can see it on schedule one on聽聽
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line five you can see that loss coming through and聽
that is reducing his other forms of income here by聽聽
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2038. okay now you're probably wondering what what聽
if i can't deduct that loss what if my income's聽聽
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too high what if i'm not actively participating聽
then what happens with that loss do i lose it does聽聽
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it go away well the answer is no but let me show聽
you where it shows up on your form so you know聽聽
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that it's still going to be there in the event聽
you cannot deduct the loss in the current year聽聽
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you'll see that there's no loss showing down here聽
comparing and contrasting when we could deduct聽聽
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the loss the loss does flow through down the line聽
26 but when we can't deduct a loss nothing comes聽聽
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through here which means that it's gonna go to聽
another form remember you don't lose it you just聽聽
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can't deduct it right now now regardless of how聽
many rentals you own the max loss you can deduct聽聽
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in a given year is twenty five thousand dollars聽
whether you own one property or ten properties聽聽
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really doesn't matter that's what you can expect聽
so even though we have no loss coming through聽聽
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that loss actually does transfer to this form聽
right here you want to familiarize yourself with聽聽
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form 8582 and as you can see on line 3b there's聽
that loss right there two thousand thirty eight聽聽
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dollars and think of this form as like a holding聽
bucket it's gonna hold the losses you can't use聽聽
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and as the next year rolls around let's say you聽
have more passive income as you make more passive聽聽
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income it's going to unlock the losses that are聽
tracked here so you're going to be able to offset聽聽
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your future rental income so even though you can't聽
deduct it right in this tax year you're going to聽聽
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be able to deduct it in a future tax year once you聽
generate more passive income but remember the more聽聽
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income you make passive income from other rentals聽
then the more you can use those unused losses so聽聽
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even if you can't deduct them now you're going聽
to be able to deduct them eventually which is聽聽
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the beauty of rental real estate you never will聽
lose a loss it just gets held in captivity until聽聽
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on that form 85 82 until you make more money聽
if you decide to sell the rental though there's聽聽
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one exception if you sell the rental during聽
that year whatever amount you have sitting聽聽
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in on u's passive losses on form 85.82 what it's聽
going to do is it's going to unlock that for you聽聽
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the sale of the rentals of that of a particular聽
rental is going to unlock those unused losses for聽聽
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that rental and allow you to deduct them all in聽
that year all right ladies and gentlemen i hope聽聽
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you got a lot out of this video and what you can聽
expect when it comes to deducting rental losses聽聽
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let me know what questions you have or if聽
this was helpful down in the comments below聽聽
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also let me know what type of tax video you聽
want to see next leave those kind of comments聽聽
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and questions down below until then take care and聽
i hope to see you guys in next week's video peace
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you
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