Your Tax Questions Answered
Residential Real Estate - Profit or Loss?
Kiplinger editorial director Kevin McCormally and fellow tax experts Peter Blank and Mary Beth Franklin tackle your most pressing tax challenges.
April 13, 2009
QUESTION: I am trying to determine whether I made a profit by renting a house I own. For 2008, the rental income was $12,000 dollars and the expenses were $10,000. This looks like a $2,000 profit. But depreciation is $4,000, which changes it a $2,000 loss. I ask this because the tax instructions say I have to operate at a profit 2 of every 5 years in order to deduct the rental related expenses, or I have to prove it is a real business some other way. There aren't any complicating factors like partial personal use or being a passive activity. -- DGM
KEVIN ANSWERS: By definition, rental activities are passive activities, but there is
an exception that allows taxpayers who are actively involved with the
rental (choosing tenants, setting rents, etc.) deduct up to $25,000 of
rental losses a year, if their income is under $100,000.
(The allowance phases out as income moves to $150,000.)
Don't worry about the hobby loss rule; it generally does not apply to real estate because your profit may come when you sell the property years from now.
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Reader Comments (3)
Posted by: Terri at 12/28/2009 01:11:11 PM
My husband and sisters sold his mother's house and split the proceeds. The house was in all three of their names not his mother's. Would this be taxed as income rather than estate taxes or inheritance taxes since the house was in the children's names?
Posted by: Nan at 01/22/2010 01:58:04 PM
I want to allow my nephew to live in my 2nd home and pay the utilities. This would amont to less than fair market value. I am not finding IRS info on the tax implications. Is utiltiy expense considered rent? If property taxes are $5000 and utilities are $2500, can I receive other payment from him to cover the difference? Fair market value rent would be about $1500/month w/o utilities. My goal is to help my nephew, not to make a gain. No mortgage on house.
Posted by: Dave at 02/21/2010 10:35:23 AM
I have a condo near a university which my son lives in one bedroom and I rent out the two other bedrooms to non related tenants. Is there a way I can claim a rental deduction? One room was not rented for 6 months last year. I calculate that with full rental, I am loosing (or paying for my son's rent) about $500/month w/o considering depreciation.