Retirement & Financial Planning Report

If you have tax losses from rental property, they are considered "passive activity losses." In most cases, taxpayers whose adjusted gross income (AGI) is under $100,000, on a single or joint tax return, can deduct up to $25,000 in passive losses. If your AGI is over $100,000, you face a phaseout of deductible losses. Once your AGI is over $150,000, no passive losses can be deducted.

Suppose, for example, John Smith owns a rental property that generated a $15,000 loss in 2008. John’s AGI in 2008 was $125,000. John’s AGI was 50 percent through the $100,000-$150,000 phaseout range so he can deduct only 50 percent of the $25,000 maximum: $12,500.

If John can deduct $12,500 of his $15,000 loss, what happens to the other $2,500? He can carry it forward to future years as a suspended passive loss. Over many years, John may accumulate many thousands of dollars in such suspended losses.

When John disposes of this rental property, he can deduct all of those suspended losses, regardless of his AGI that year.

Thus, if you sold investment property in 2008, don’t forget to include any suspended losses when you prepare your tax return for last year. Similarly, if you sell a property this year, such losses will be deductible on your 2009 return.