Schedule E is the IRS form in which you enter the rental income, and your rental operating expenses. Think of it as a Profit and Loss Statement. Your profit or loss is the difference between your rental income and your expenses, including the depreciation on your rental property. This profit or loss is reported on your IRS form 1040. As I mentioned in an earlier part of this series, your loss may be limited based on your Modified Adjusted Gross Income (MAGI). Should your loss be limited or entirely excluded, it is carried forward, along with prior years’ accumulated excluded losses, and used as follows:
- In a tax year where there are no restrictions limiting the loss
- In the tax year you dispose of your rental property
The rules on loss limitation are complex, and are fully covered in IRS Publication 527, “residential Rental Property”. In general terms, the loss limitations work as follows, using a “married filing jointly” tax status:
- You can exclude up to $25,000 in passive rental losses against non-passive income, with MAGI up to $100,000.
- If your MAGI is more than $100,000, and less than $150,000, the $25,000 maximum loss is reduced, based on the actual MAGI.
- If your MAGI exceeds $150,000, no loss is allowed.
- Again, any limited losses will be carried forward.
Following are a few guidelines and pointers on dealing with Federal tax issues relating to residential rental real estate;
- Keep very careful and detailed accounting records for your rental income and expenses.
- Keep detailed mileage records of your auto use by trip, including destination and purpose.
- Depreciation is required by the IRS. It is NOT an option.
- Unless you are a real estate professional, your rental income or loss is considered “PASSIVE” for federal tax purposes, and are subject to those rules.
- Accounting and tax issues relating to your rental(s) are complex. I strongly recommend you minimally consult with a professional Tax and accounting company. There are both short and long term tax implications in passive rental activities.
- Reporting the sale of a passive rental property on your Federal tax return is very complex. I’ll cover those issues in a future Blog article.
Please don’t hesitate to call us for a free no obligation consultation on your passive rental. We will also review your prior year tax return, free of charge, to insure the full return was done accurately. Contact us at:
CPA ACCOUNTING AND TAX SOLUTIONS