The IRS imposes strict limitations on losses from investments in tax shelter deals like limited partnerships. Generally, taxpayers may only offset tax shelter losses with income that is generated from similar investments. Furthermore, taxes on non-shelter income such as stock profits and wages cannot be offset by shelter losses. Nevertheless, investors may benefit from several exceptions to the restrictions that are applicable to tax shelters.
Taxpayers may receive limited relief for losses up to a maximum of $25,000. The tax code allows this type of relief to small-scale rental property investors. Qualifying properties may include stores, multi-family homes, condos, and cooperative apartments. The investor must be an active manager of the property in order to qualify to write off rental property losses. The IRS considers a landlord to be an active property manager if he or she participates in making key decisions such as choosing tenants, approving expenditures, and deciding on rental terms. Owners are allowed to delegate day-to-day activities like making repairs, landscaping, collecting rent, and answering emergency phone calls. The landlord must have at least a 10 percent ownership interest in the property.
While lower- and middle-income landlords may offset up to $25,000 of their losses against other income, taxpayers who are married, but file separate returns and live apart the entire tax year may offset a maximum of $12,500. Married couples who live together and file separate returns are barred from receiving the offset.
Only individuals whose adjusted gross income falls below $100,000, without regard to shelter losses, may receive the full offset of $25,000. The offset decreases by $1 for every $2 in excess of the $100,000 ceiling. Incomes that exceed $150,000 do not qualify for the offset.
Because writing off rental property losses increases the likelihood of being audited by the IRS, taxpayers should work with a knowledgeable certified public accountant when preparing their tax returns. Gary M. Kaplan understands the complexities of shelter write-offs and their restrictions. Taxpayers in Florida, New York, Maryland, Washington, D.C., and Utah are encouraged to contact Mr. Kaplan to get the help they need in determining whether they can write off rental property losses.
