Question

What do I report if my rental property expenses are more than my income?

Answer

You must always report gross rental income. Report real property on Schedule E that’s rented:

  • All year (or continuously after a certain date)
  • At fair market rent

Different rules might apply when:

  • You have personal use of the property.
  • You rent the property for less than fair market rent.

On Schedule E, you can reduce the gross rent by your rental property expenses. Your investment, including expenses, must be at risk. When your rental property expenses are more than income, you usually can’t claim the loss since rental activities are passive activities.

However, you can claim all or a portion of the loss if an exception to the passive activity loss rule applies.

You can use passive losses to offset passive gains. Ex: You own other rental real estate where income is more than rental property expenses. The loss from one property might offset the gain from another.

Active Participation

In order to claim residential rental losses up to $25,000, you must:

  • Meet income requirements
  • Have active participation

In order to be an active participant, you and your spouse must own at least 10% of the property and your involvement must be:

  • Regular
  • Continuous
  • Substantial

This is a less stringent standard than material participation. However, you must have made management decisions in a significant and real sense. Management decisions include:

  • Approving new tenants
  • Deciding on rental terms
  • Approving expenditures
  • Other similar decisions

Real Estate Professional With Material Participation

If you’re a real estate professional, you’re not considered passive in your rental activity. In order to be a real estate professional, both of these must apply:

  • You spend more than 50% of your working time in real estate trade or business activities.
  • You spend more than 750 hours in the real estate trade or business activities — not necessarily your rental.

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