Special Allowance for Residential Rental Properties / Form 8182

[Burke]

If a taxpayer has net losses from residential real estate, he is allowed to deduct up to $25K (assuming he is eligible based on income, etc) against other income. Can he opt-out of this treatment and allow the loss to carryover to the next year? In effect, treating it as a suspended loss? I can't find anything that says that is an option....

[TaxGuyBill]

No, it is not an option. So if they qualify to take the loss they must take it. Sorry.

[Burke]

That's what I thought, but was hoping..... After applying against other income, if the result is still negative, does it generate an NOL? Or does it have to exceed the standard/itemized deductions as well?

[EvenKeelTax]

How much of the expenses causing the loss could be depreciated instead of expensed as repairs?

[Burke]

If all were included as improvements then it would be a quite a lot.

[EvenKeelTax]

If all were included as improvements then it would be a quite a lot.

Maybe not a perfect solution for your client, but depreciate all those improvements. New roof, windows, furnace, siding, etc can be spread out over 27.5 years. Might be a stretch to try and depreciate a few gallons of paint, but a lot of improvements can and should be depreciated...

[TaxGuyBill]

That's what I thought, but was hoping..... After applying against other income, if the result is still negative, does it generate an NOL? Or does it have to exceed the standard/itemized deductions as well?

NOLs start at what USED to be Line 41. That is AGI minus the Standard/Itemized deduction.

Just a reminder ... the CARES Act changed NOLs. Unless you make the election to "waive the carryback", NOLs are now carried back 5 years. However, the 1045 has not been updated yet, and your software MIGHT not yet have the "waive the carryback" election yet (there was no need for it before the CARES Act).

See also my comments below.

Maybe not a perfect solution for your client, but depreciate all those improvements. New roof, windows, furnace, siding, etc can be spread out over 27.5 years. Might be a stretch to try and depreciate a few gallons of paint, but a lot of improvements can and should be depreciated...

That is a great idea. Let's take this a step further. §1.263(a)-3(n) has an election to capitalize Repair and Maintenance costs which would spread out the deductions.

However, Burke mentioned it may create an NOL. If that is the case, it would probably be better to take the full deductions to get the NOL. It is the 'nothing' zone that should be avoided (income low enough that the deductions don't reduce income tax, but high enough that there is NOT an NOL).

[Burke]

NOLs start at what USED to be Line 41. That is AGI minus the Standard/Itemized deduction.

That's what I thought. Just wanted to verify. I also heard that if you were in such a situation, it would be better to itemize if they happened to be less than the standard, since you are already at little or no AGI. That would produce a bigger NOL, especially with the increased standard deds we have today.

[TaxGuyBill]

I also heard that if you were in such a situation, it would be better to itemize if they happened to be less than the standard, since you are already at little or no AGI. That would produce a bigger NOL, especially with the increased standard deds we have today.

That doesn't make sense to me, but I really need to deal with NOLs. Wouldn't the Standard/Itemized deduction increase the NOL? The larger Standard Deduction would make the negative amount larger, which means a bigger NOL, right?

[Burke]

Yes, you are right. I am afraid this TP is in the "nothing zone" you mentioned. Income is low enough so that deductions don't reduce income tax, and high enough not to produce an NOL.