Deducting Large Rental Loss

Today TaxMama® hears from Bernice in the TaxQuips Forum who is concerned. “Are there no limits for an “active” real estate investor with even just one rental? Or is the $25,000 limit applicable to him as well? I ask because my software allowed a $31,000 loss and so far it was accepted! Now I may need to file an amended return…but even advice from the IRS says let it go thru channels and if they get a letter deal with it then… Seems strange to me – with more penalties & Interest accruing all the time?”

Ask TaxMama 

 Hi Bernice,

If your BUSINESS is real estate, essentially full time, you don’t have the same limits as a rental property owner. Those are two different things.

For the rental property owner who does something else for a living (or even lives on investments), the limit to the deduction, is, essentially $25,000.

You don’t mention having sold a property, or other passive activities on your tax return. But David Toelkes, a real estate investor from South Carolina, reminds us that there are two ways to generate a loss higher than $25,000:

1. You sold the property during the tax year. When you sell the rental property, any prior year suspended passive losses can be recognized without regard to the $25,000 net passive loss allowance limit and without regard to income restrictions.

2. You sold your interest in a passive activity. Perhaps you held units or shares in a limited partnership that you sold. If your limited partnership had passive losses from this tax year in addition to suspended losses from prior years, then sale of your interest allows you to recognize your total accrued passive loss in full without regard to the $25,000 net passive loss allowance limit and without regard to income restrictions.

So review the tax return to see there was any such activity – or if it really was a software error.

And remember, you can find answers to all kinds of questions about passive losses and other tax issues, free. Where? Where else? At

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