AboutHelen P. O`Planick, EA Expertise I am a tax professional, with experience in individual taxation. I would prefer not to answer questions about non-resident aliens or corporate taxation. Please do not ask me state related questions, unless the state is Pennsylvania. There are 42 taxing states and 42 TOTALLY different sets of state tax law.
Experience I have been preparing tax returns almost all my life. I have been in professional practice for 25 years and I am enrolled to practice before the Internal Revenue Service.
Organizations National Association of Enrolled Agents
Publications I am a prior Money Magazine Tax Test taker and have been quoted extensively in all media including monthly periodicals and books by tax authorities.
Expert: Helen P. O`Planick, EA Date: 8/27/2008 Subject: How to deduct passive rental property losses from SE tax.
Question QUESTION: "Hello Helen —?
I qualify as a real estate professional except for the 751 hr. minimum and I
probably qualify on that as well for '07. If I qualify, where and how do I
deduct my rental property losses to avoid the SE tax on my active real estate
income (from part time remodeling contracts)? In filling out sch.C, can I just
refer to the sch. E rental property income/loss statement? If I don't have the
total hrs. to qualify, can I apply the $25,000 PAL exemption (I'm well under
the $100,000 limit) against my Sch. C bottom line to reduce SE taxes? Or can
I only take it off my AGI??
Thank you for your quick reply. A son's student financial aid app. is hung up
on my '07 return not beinging filed yet.
ANSWER: You don't reduce your SE income by rental properties. They are totally separate.
Your rental losses, if you are considered an RE pro, are allowed no matter what your AGI is. So it can offset the Sch C income, but the C and E do NOT combine at all to reduce SE tax.
Helen, EA in PA
---------- FOLLOW-UP ----------
QUESTION: Hello again,Helen;
Thankyou very much for your incredibly fast reply. Nevertheless I'm still
confused. I finally read today a bit of info. stating that an RE pro can't lump
rental activity hrs. together with non-rental activity hrs. to meet the 750 hr.
minimun qualification. And it sounded like even if I have enough non-rental
activity (i.e. in the sch. C remodeling business) to qualify, that I still can't
apply rental activity losses from my 5 properties to offset sch C income?? To
do that I'd have to be qualified as an RE pro in each separate rental activity. Is
that correct? Elsewhere it sounds like yes, I can offset income from any real
estate activity, remodeling included, with rental activity losses, so long as I
meet the 3 RE pro qualifiers. If that's the case, and I can reduce Sch C income,
wouldn't that automatically and proportionally reduce the SE tax?
Thanks again for your time and careful consideration. — Charlie
Answer Charlie, look at a 1040. Sch C is one line, Sch E is another. C and E offset. SE is NOT offset by Sch E losses.
So you can have a Sch C with $5000 in income, rental losses of $5,000, owe no INCOME tax, but you will owe SE tax on the Sch C profit of $5,000.
