Question about Passive Income tax please!?
I do not understand this question why it is answer B ,000. Please help.
Tom owns a rental apartment building property. This is the only rental property that Tom owns. He "actively participates" in this rental activity as he collects the rents and performs ordinary and necessary repairs. In 2009, Tom had a loss of ,000 on this renta l activity and had no reportable passive income. His adjusted gross income, without regard to this rental loss, is 60,000. How much of rental loss may Tom deduct on his 2008 return?
I thought you can deduct passive loss up to passive income. Since he has no passive income the answer is 0? Is the book wrong or something when it says the answer is ,000?
Hi Boston. Thank you so much. Just another question. If the taxpayer did not actively participate in rental real estate activity and cannot deduct any of the loss against nonpassive income, right? Dividends and interest are not considered passive income. If they actively participated in activity then they can deduct up to ,000 of loss from nonpassive income ?
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StephenDoughty8840 (27)
ray @ how to make... (1)
Suzanne (1)
You can deduct passive losses up to the amount of passive income without limitation and once that’s exhausted, against other income up to $25,000 per year.
In Tom’s case, his passive income is $0 so he can deduct $25,000 in passive losses against other income. The remaining $5,000 is carried forward to the next tax year where he uses it against any passive income next year and then in $25,000 chunks each year. If there are any remaining passive losses when he sells the property he uses them to adjust his basis in the property when calculating his capital gain or loss on the sale.
Edit: If the owner does not actively participate then the passive activity loss limitation is $0 and it all gets carried forward if there is no other passive income. The IRS is pretty lenient on what constitutes "active participation" however so pretty much all landlords qualify. Even if you use a property manager for the day-to-day management, as long as you reserve the final say on all tenants, major expenditures and any other major decisions then you’ll meet the active participation standard.
There’s another "gotcha" with passive losses. You also have to meet the "at risk" rules. You have to have a financial stake in the property to meet the at risk rules. A financial stake would include any down payment made as well as the liability for any shortfall in a mortgage upon foreclosure or the risk of loss of your investment to fire or other catastrophe. Having insurance against those contingencies does not wipe out your at risk position. Unless they acquired the property by gift or bequest most taxpayers meet the at risk rules.
if you are claiming a rental, it is always passive income
if you are in the business of renting that is another matter
but passive losses are limited and that amount is $25,000 which if you have a good computer program which you can carry forward each year, keeps the record of your passive losses which may be recovered when you sell it(but don’t count on it)
if you did not participate you are more than like in some kind of rental partnership and that would be reported another way