| |
You are here: Experts > Business > Corporate Law > Tax Law (Questions About Taxes) > How to deduct passive rental property losses from SE tax.
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.
Helen, EA in PA
---------- FOLLOW-UP ----------
QUESTION: One last go at this, Helen, and I promise to leave you alone. Please bear with
me long enough to carefully read through my two rather intertwined
questions — and I do apologize for their entanglement. I don't think I was
being specific enough with to make it clear what I'm asking, so here goes:
Is there any way that rental losses, for an RE pro, can be entered on Sch C
somewhere on lines 8 -27 or 48 in order to reduce line 31? That is, INSTEAD
of entering them on Sch E.? Forget Sch. E. Sure, I know C is C and E is E and
never the twain shall meet except arithmetically on line 22 — but never on
Sch SE. Always understood that. But Stephen Fishman's statement on pg. 329
of his Every Landlord's Tax Deduction Guide
"People who qualify for the (RE pro) exemption can treat all of their losses
from rental properties as active losses "
led me to think that there might be some way to take them off Sch C before
ever reaching line 31, RATHER THAN entering them on Sch. E. Speaking of
Fishman, he makes it clear in several places that "you may combine the time
you spend on each [business]" in order to pass either the 751 hr. or the 51%
-of-time requirements. Then he seems to make an exception of rental
property activities (pg. 339), then immediately follows up with an example on
pg. 340 where he combines real estate hrs. w/ rental property management
hrs. to qualify [Maxine] for the RE pro exemption. Can you see why I coming
across as a bit ivory-skulled Helen? And of course Fishman never but never
mentions anything about an RE pro's using C instead of E to report losses.
That would have helped a lot if he had.
Once again, thankyou very much for your patience and time.
Charlie
Answer
The ONLY reason to be a RE pro is so that your losses are not limited. That is all. NEVER does a rental (unless you are in the business of renting ladders, etc) go on a Sch C. It ALWAYS goes on Sch E.
Rental losses are passive by nature, but qualifying for the RE pro allows them to become active IF your AGI is over the 125K.
As for this author, I've never heard of him, so I can't comment on his work, but if he at all suggests putting a rental property (without services) on Sch C, his book is worth about as much as the Charmin in the bathroom.
:)
Helen, EA in PA
Add to this Answer
Ask a Question
|
|
