How should I handle rental losses since I'm filing three years of tax returns?

How should I handle rental losses since I'm filing three years of tax returns?

by Dafna Meltzer, CPA | Nov 13, 2017

I have to file my past three years of tax returns, and have a question about rental losses. I am a U.S. citizen living abroad. I advertised and approved all renters, decided on rental terms/repairs, and even collected rent directly for two of the three years. Even when I had a property management firm helping me, I made all the decisions and decided on repairs, etc. My question is, am I required to take the $25,000 allowance and thus follow the net operating loss route, or can I carry forward the passive losses? IRS Form 925 states that I can take the allowance (since I participated actively), but does not say that I am required to take it. One CPA I selected is encouraging me to not take the allowance.

Rental losses are not required to be taken, but you either use them or you lose them. You cannot not report them, and somehow "carry them" as you seem to imply. Reporting the losses, even if nondeductible in the current year, preserves them.

Furthermore, upon disposition you will have to pay ordinary income tax on depreciation "allowed or allowable," meaning that even if you did not take depreciation, because you were entitled to take it, you would have to pay tax on it.

I am assuming that this is only a portion of your taxable income, and I would encourage you to go back to your CPA and ask him/her to explain the overall strategy so you can make a well-informed decision.
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Answered by: Dafna Meltzer, CPA, is with Meltzer & Meltzer CPAs in Elkins Park, Pa.
The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
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