Gary Bode, CPA: for a free consult with a Wilmington NC CPA firm that understands the complex issues of Schedule E, please call (910) 399-2705.
CPA tax preparation of Schedule E, on IRS Form 1040, involves many issues. But, we’ll discuss the passive activity loss limit for rental real estate. Mostly from the perspective of a small landlord with a single rental unit that is also used for personal purposes. Partnerships and S Corporations use Form 8825, which is similar to Schedule E.
Schedule E Tax Strategy: Personal Use of Rental Property
The traditional goal of rental properties is to cover your expenses while the property appreciates in value. But sometimes they need to use the property personally, while still claiming a loss on Schedule E. Folks often have rental properties they use as vacation homes. Or have related tenants who pay sub market rents. Proactive tax structuring of such rental properties may achieve these personal goals and still be bullet proof on an IRS tax audit. Despite claiming tax losses. We’re not talking shady deals here either.
We’re a Wilmington NC CPA firm that deals with Schedule E and understands the complex rules for personal use and passive activity loss. If you’d like a free initial consult with a tax accountant, please consider calling us at (910) 399-2705.
Landlords often have tax losses. Which may not match the property’s cash flow. Why? Because the IRS allows depreciation of the rental unit over 27.5 years, in addition to cash expenses. However, you must qualify to deduct Schedule E losses on Form 1040. We’ll see how to do this later.
Proactive tax positioning for Schedule E tax preparation is prudent and legal. CPA tax preparation of IRS Schedule E should address any likely reason there could be an IRS tax audit. Good tax positioning for residential real estate property rentals can avoid sending up IRS red flags. Don’t worry if your specific situation is a little unusual—circumstances can be explained on additional schedules. IRS tax audits of Schedule E are common, because rent is often unverifiable and personal use of the rental property is an issue. Explanation of specific circumstances may avert a tax audit.
Passive Losses on Schedule E
Residential real estate rental losses are “passive” losses for IRS tax preparation purposes. Generally they can only be used to offset passive gains. Ouch! But there is a nice loophole.
The Passive Activity Loss Limit
If you “actively” manage the rental property, up to $25,000 of rental property losses can be deducted on Form 1040, if you have less than $100,000 of modified gross income. The trick is being considered active. Having professional management of the property could negate you being “active”. If you have rental real estate losses, and less than $100,000 in modified gross income, it pays to manage the place yourself. You should call and arrange for repair and maintenance services. You should interview and decide on tenants. Etc.
Other Schedules and Forms You May Have To File
- Schedule A for personal components of mortgage interest and real estate taxes (if there was personal use of the rental property).
- IRS Form 4562 to claim depreciation on assets placed in service, to make an election under section 179 to expense certain property, or to report information on listed property.
- IRS Form 4684: casualty loss. Like a fire for example.
- IRS Form 4797 to report sales, exchanges, and involuntary conversions (not from a casualty or theft) of trade or business property.
- Form 6198 to calculate allowable loss from an at-risk activity.
- Form 8582: allowable passive activity loss.
We’re a Wilmington NC CPA firm with solid experience in residential and commercial rental tax preparation. For a free consult, please give us a call at (910) 399-2705.
