[quote author="stepping_up" date=1231243630]I didn't want to "pester" him, but figured if he saw the post and felt inclined to respond, I would be ever so grateful. I know, I should consult a professional tax consultant at this point, but due to some unexpected raises on both our ends, I want to see if it makes sense to increase hubby's 401K or maybe we just dump the property at a loss.... want to get a rough idea before consulting professional.</blockquote>
Understood. From my uneducated eye, Ipop looks to be right... but there are 9 chapters of tax code dedicated specifically to Passive Activity Loss Audit Technique.
Good luck stepping_up, and congrats on the raises.
-IR2
Here is what the IRS says regarding rental loss limits for individuals:
<a href="http://www.irs.gov/businesses/small/article/0,,id=146325,00.html">http://www.irs.gov/businesses/small/article/0,,id=146325,00.html</a>
<strong>Chapter 1: Overview</strong>
Introduction
Prior to 1986, a taxpayer could generally deduct losses in full from rental activities and trades or businesses regardless of his or her participation. This gave rise to significant numbers of tax shelters that allowed taxpayers to deduct non-economic losses against wages and investment income. <strong>The Tax Reform Act of 1986, added IRC ? 469, which limits the taxpayer?s ability to deduct losses from businesses in which he or she does not materially participate and from rental activities.</strong>
The passive activity loss rules are applied at the individual level and extend beyond tax shelters to virtually every business or rental activity whether reported on Schedule C, Profit or Loss From Business (Sole Proprietorship); Schedule F, Profit Loss From Farming; or Schedule E, Supplemental Income and Loss, as well as to flow through income and losses from partnerships, S Corporations, and trusts.
The passive loss limitations also apply in full to personal service corporations. The IRC ? 469 also applies to closely held C Corporations, but has a limited applications.
The following is a brief overview. If an issue arises in any specific area, see the referenced chapters for in-depth discussions.
Types of Passive Activities
<strong>In general, losses generated by passive activities can only be used to offset income generated by passive activities.</strong>
There are two kinds of passive activities (IRC ? 469(c)):
Rentals, including equipment leasing and rental real estate; and,
Businesses in which the taxpayer does not material participate (includes activities on Schedules C or F and from partnerships, S Corporations and LLCs[1])
What is Passive?
Income and losses from the following activities are generally passive[2]:
<strong>Rental real estate </strong>(except rentals in which a real estate professional materially participates ? IRC ? 469(c)(7))
Equipment leasing
Sole proprietorship or farm in which the taxpayer does not materially participate (i.e. does not regularly work)
Limited partnership interest, with some exceptions[3]
Partnership, S c, and limited liability company business in which the taxpayer does not materially participate
Income and losses from the following are generally non-passive:
Salaries, wages, and Form 1099-Misc commissions
Guaranteed payments
Portfolio income (interest, dividends, royalties, gains on stocks and bonds)
Sale of undeveloped land or other investment property
Royalties
Sole proprietorship or farm in which the taxpayer regularly works (i.e. materially participates)
Partnership, S Corporation or LLC business in which the taxpayer materially participates.
Activity Rules
The term ?activity? under IRC ? 469 does not necessarily mean a single business or separate entity owned by the taxpayer. Depending on the grouping decision made at the time the activity was acquired or in 1994 when the regulations were finalized, a taxpayer can treat several businesses as one single activity if they form an appropriate economic unit. Or, there could be two or more distinct activities within a single entity. For example, there could be a rental activity and a business activity within the same partnership.
Because material participation[4] is determined for each activity, the way the taxpayer?s business and rental operations are combined or divided into ?activities? is very important.
Businesses forming an appropriate economic unit may be grouped into one single activity based on the following criteria[5]:
Similarities/differences in types of activities
Extent of common control
Extent of common ownership
Geographic location of the activities
Interdependence between activities
For more information on activities, refer to Chapter 8.
Exceptions:
The general rule in IRC ? 469 provides that passive losses can offset only passive income. There are, however, exceptions:
On an entire disposition to an unrelated party in a fully taxable transaction, both current and suspended losses may be deducted against wages, portfolio income and other non-passive income[6]. See Chapter 5.
<strong>Rental real estate losses up to $25,000 may be deducted by an individual whose modified adjusted gross income (MAGI) is less than $100,000[7]. To qualify for this offset, the taxpayer must actively participate, own at least 10 percent and not be a limited partner. The $25,000 exception is phased out at the rate of 50 cents for every dollar of MAGI over $100,000. Therefore, when MAGI exceeds $150,000, the $25,000 offset is not allowed. See Chapter 2.</strong>
