Resources - Financial Terms

The Internal Revenue Service views the income from rental properties as passive income and applies special passive-activity-loss rules to that income.

When purchasing income-property, your occupation and role in the management of your property is one factor that will determine how much you can write off in rental losses each year on your tax return.

If you have recently purchased an income producing property and the property will have a negative rental income, be sure to check with your accountant or legal adviser to determine if you qualify to write off rental losses.

If the income property that you are purchasing has a positive income, your occupation and role in the management of the property doesn't mater. The positive income from the property will be taxed the same in all situations, as ordinary income.  
 
Real estate professionals can write off all rental losses in the year of the loss on their tax return. No rental losses are carried forward; they are written off in the year of the loss. You must meet IRS guidelines to claim real estate professional status. The IRS guidelines for claiming real estate professional status can be complicated depending on your situation. Be sure to consult with your accountant or attorney to determine if you qualify to claim real estate professional status.

If you own part or all of an income property and do not actively participate in the management of the property, you can not write off rental losses in the year of the loss on your tax return. When you sell the property, you can write off all unused rental losses that have accumulated while you have owned the property.

If you are an active participant and your adjusted gross income is $150,000 or more, you can not write off rental losses on your tax return in the year of the loss.

Be sure to verify IRS guidelines if you are going to claim active-participant status.

You should be aware that when you sell your income property, you can write-off any unused rental losses that have accumulated while you have owned the property.

Please consult a professional such as a tax professional, accountant, or attorney, as the information above may have changed.