Passive activities, such as most rental properties, are reported on Schedule E of your tax return, and passive losses generated (like those from Cost Segregation depreciation) can generally only offset passive income, not active income like wages. Net losses from one passive property can offset profits from another passive property, but total passive losses cannot offset active income unless you qualify as a Real Estate Professional (REP) or meet other specific exceptions.
The IRS allows the use of Grouping Rules, where you can group multiple rental activities into a single activity if they form an appropriate economic unit. This grouping can help meet material participation rules and simplify reporting, but it requires careful compliance with IRS guidelines. Careful planning is essential to ensure you maximize your deductions and the utilization of benefits like Cost Segregation while staying compliant.
Passive Losses & Utilization Rules
- Reporting: Most rental properties are classified as passive activities and reported on Schedule E of your tax return.
- Loss Offset Rule: Net losses from one passive property can offset profits from another passive property.
- Limitation: Total passive losses cannot offset active income (like wages or capital gains from stock sales).
- Exception: Passive losses can offset active income only if you qualify as a Real Estate Professional or meet other IRS exceptions.
- Grouping Rules: The IRS allows investors to group multiple rental activities into a single economic unit, which can aid in meeting material participation rules and simplifying reporting.
