Rental Property Loss Limitation

[DonohueT]

My client is married and owns a rental property with his sister who is single. Each own 50% of the property. My client for the past two years has not been able to take the losses
on the rental property due to the AGI over $150K. Any suggestions on how my client can avoid this penalty?

[Lion]

It's not a penalty. Passive losses are deferred until they can be used against passive income in the same activity or until the property is sold in a fully-taxable transaction. There is an exception for taxpayers with AGI under $150,000 to be able to deduct up to $25,000 per year in rental losses. Your client doesn't qualify for that exception. She could make less money. Or make retirement contributions, HSA contributions, &/or other adjustments that lower her AGI. She could sell her property to release all prior suspended losses.

[Roland Slugg]

She could make less money. She could sell her property to release all prior suspended losses.

She? The person who posted this was asking about his own client, not his client's sister.

Lion, would you actually advise a client to intentionally make less money? Just to be able to deduct otherwise suspended losses? Seriously?

There are two other cautionary points concerning a possible disposition of the property ....

If the brother sells his interest to his sister (or to any other related person as defined in Code §267(b)), his suspended losses will not be "released" until such time as the property is sold to an unrelated person. Code §469(g)(1)(B)

If the brother makes a gift of his interest to his sister (or to any other person), the suspended losses are not deductible at all. Instead they are to be added to the basis of the property in the hands of the donee. Code §469(j)(6)

[Lion]

Sorry. HE. I'm sleep-deprived.

I was a bit surprised that someone thought the client was being penalized because he can't currently deduct rental losses. (He would be blessed with a valuable exception in the IRC if he had the misfortune of making less money.) What about clients with K-1s from PTPs with multiple activities that can't net gains against losses? Taxes aren't "fair," they're just the law. We need to educate our clients that engage in passive activities.

So, my suggestion of make less money was mostly facetious.

But, I actually have used it with clients who have some discretion over their income, bonuses to be received in December or January, SE with work in progress to invoice in December or January, purchases to make or not make until next year, etc. No different than the bunching concept of itemized deductions. Some mid-year or fall planning with our clients can smooth out some of the tax bumps and help prevent them from turning into unhappy surprises next tax season.

[DonohueT]

Thanks for your comments. I understand that the losses can be deferred but in the eyes of the client he thinks it is a penalty for that tax year especially when he was single he was able to take the loss deductions.
Thanks again for comments.

[Lion]

Tell him that the greater income in his married life is not a penalty. And, tell his wife to not let his unhappiness with her added income make her feel like she's a penalty. Sounds like SHE's being penalized in this marriage!