 Income tax 2021-2022 reporting rental income expenses and losses part number 3. Get ready to get refunds to the max. Dive it in. Income tax 2021-2022. Most of this information can be found in Publication 527 Residential Rental Property Tax Year 2021 on the IRS website irs.gov, irs.gov. Income tax formula. We're focused on line one income, although we would have a separate sub-schedule. Basically an income statement with income and expenses, expenses basically being deductions. The net then what rolls in to line one income of the income tax formula as well as eventually page one of the form 1040. This is the schedule E basically that income statement schedule called the supplemental income and loss. We're focused on the rental real estate. So we've been talking about losses with regards to real estate. So it's a little bit different when we record the schedule E from the schedule C because when we talk about the schedule C. We're usually talking about an active business, possibly a service business where we actively participate when we talk about the schedule E. Although it's the same kind of like income statement type of schedule income minus expenses that rolls in eventually to page one of the 1040. The irs is more skeptical in particular about losses with regards to the schedule E. We're thinking now about the passive activity kind of limitation. So they kind of say they said back at some point that all rental activities were just going to label as basically passive activities. Unless there's exceptions and those exceptions have these key terms. If you're a real estate professional, then you qualify for real estate professional possibly then being able to take more of the losses and not being a subject to the passive activity rules. That's a key term we discussed. And then we talked about kind of if you active if you actively participate, then although you're still subject to the passive activity rules, you might have some allowance for the deduction of losses against not just passive income, but possibly against other income as well, such as like W2 income or active participation income. So we're now on the maximum special allowance. The maximum special allowance is $25,000 for single individuals and married individuals filing a joint return for the tax year. So so the $25,000 is that special component you might have then $25,000 $12,500 for married individuals who file separate returns for the tax year and lived apart from their spouses at all times during the tax year. So you got that special kind of rule for the married filing separate. Remember that with regards to the filing statuses, we can think of them in terms of your options if married, your options if not married, if not married, then you might be single filing status or you might be head of household filing status. If married, then you typically would be filing married filing joint unless you opted to file for married filing separate. You can't go back from married if you're legally married at that point generally unless some exception applies going back to single or head of household unless there's like a divorce or separation or something like that. So once again, it's at $25,000 for single individuals and married individuals filing a joint return for the tax year. But then we've got that $12,000 for married individuals who file separate returns for the tax year and lived apart from their spouses at all times during the tax year. $25,000 for a qualified estate reduced by the special allowance for which their surviving spouse qualified. If your MAGI that's your adjusted gross income with a modifier in front of it basically your income threshold is 100,000 or less 50,000 or less if married filing separately, you can deduct your loss up to the amount specified above which was the 25,000. If your MAGI your adjusted gross income modified modified AGI your income threshold is more than 100,000 more than 50,000 if married filing separately. Your special allowance is limited to 50% of the difference between 150,000 75,000 if married filing separately and your MAGI your modified adjusted gross income. Generally if your MAGI is 150,000 or more 75,000 if you are married filing separately there is no special allowance. So just for a quick look at that if we've got our schedule E here we've got a substantial loss the rents at 120. We've got this big loss of 264 and then we're being limited on it with the passive activity rules of the 25,000 which you can see on form 8582 8582 and we're saying that they actively participate and so on. And so they got the 25,000 loss limit so if I go to the page one of the form 1040 I've got the 100,000 of income and the loss is limited here of the 25,000 limit for the passive due to passive activity. Now if I bring the income W2 income other income up above 100,000 to 125,000 you can see that we have a more severe limitation due to that AGI the income phase out in terms of how much the loss we can calculate which would be calculated on form 8582 passive activities. And if we go over on the 1040 over 150 I'm at 151,000 and I go back to the schedule E you can see the loss is not being pulled over any more the passive activity threshold is now is now kicking in due to the higher level and threshold of income basically phasing it out. So modified adjusted gross income the MAGI this is your adjusted gross income from 1040 1040 SR 1040 in our line 11 figured without taking into account so when we're whenever you think about this modified AGI we're basically starting with the AGI on page one here which is your adjusted gross income and then making whatever modifications would be necessary for whatever thing we're talking about which in this case includes number one the taxable amount of social security or equivalent tier one railroad retirement benefits number two the deductible contributions to traditional individual retirement accounts I resin section 501 C 18 pension plans number three this is the exclusion from income of interest from series EE and and I US savings bonds used to pay higher education expenses number four the exclusion of amounts received under the employer's adoption assistance program and number five any passive activity income or loss included on form 8582 number six any rental real estate loss allowed to real estate professionals number seven any overall loss from a publicly traded partnership see publicly traded partnership PTPs and the instructions for form 8582 number eight the deduction allowed for one half of self employment tax number nine the deduction allowed for interest paid on student loans and number 10 the deduction allowed for foreign derived intangible income and global intangible low income so obviously that's a lot of it a lot of kind of adjustments on a lot of modifiers on the AGI their tax software will of course be useful to help us out with some of those modifiers but you want to be aware of them for tax planning as well when you're thinking about you know advising people in tax planning trying to project this stuff into the future against software is helpful with the projections as well so okay form 8582 not required don't complete form 8582 if you meet all of the following conditions so you don't have to have that passive activity form if the following conditions are met your only passive activities were rental real estate activities in which you actively participated your overall net loss from these activities is 25000 or less so for example here for us to take a look at this I've got the schedule E I've got I actively participate we're saying here and the losses less than than the 25000 there okay so we're going to go back on over overall net loss from these activities as 25000 or less or less if married filing separately and you lived apart from your spouse all year if married filing jointly you lived apart from your spouse all year you have no prior year unallowed losses from these or any other active passive activities you have no current or prior year you're unallowed credits from passive activities so the prior you know the prior year if we had unallowed losses would affect the current year and we'd have to get a more detailed return to have deal with those carry over kind of things your MAGI or adjusted gross income modified adjusted gross income is 100000 or less 50000 or less if married filing separately and you lived apart from your spouse all year you don't hold any interest in a rental real estate activity as a limited partner or a beneficiary of an estate or a trust if you meet all the conditions listed above your rental real estate activities aren't limited by the passive activities rules and you don't have to complete form 8582 which is nice all lines 23A through 23E of the schedule E enter applicable amounts so here's 23A you can see here and then you've got your you've got your basically the deduction that would took into place you've got line 20 was your expenses then we've got basically our loss then we're thinking about our restrictions on the possible long losses looking at form 6198 and then more likely for most like individual taxpayers were focused here on the passive activity limitations but worth under the threshold of the 25000 so we're picking up the 19000 and 40 and then line 23 total all amounts reported online 3 total all amounts online for and so on and so forth for these amounts down here and then your losses then we have online 25 at royalty losses from line 21 and so on and then we can see this basically flowing through eventually to the form 1040 which we're taking against other income which is the active income not passive income on the W2 side of things. Okay so casualty and thefts as a result of casualty or theft you may have a loss related to your rental property you may be able to deduct the loss on your income tax return casualty this is a damage destruction or loss of property resulting from an identifiable event that is sudden unexpected or unusual such events include a storm fire or earthquake theft this is this is defined as the unlawful taking or and removing of your money or property with the intent and to deprive you of it right they're probably intending to do to improve them rather than deprive you but they're depriving you in order to improve them. Gain from casualty or theft is also possible to have a gain from a casualty or theft if you receive money including insurance that is more than your adjusted basis in the property generally you must report this gain however under certain circumstances you may defer paying tax by choosing to postpone reporting the gain to do this you must generally buy replacement property within two years after the close of the first tax year in which any part of your gain is realized in certain circumstances the replacement period can be greater than two years you can see replacement period of publication 547 if that applies to you on the IRS website for more information the cost of replacement property must be equal to or more than the net insurance or other payment you received more information for information on business and non-business casualty and theft losses you can take a look at publication 547 how to report if you had a casualty or theft that involve property used in your rental activity figure the net gain or loss in section B of form 4684 casualty and thefts follow the instructions for form 4684 for where to carry your net gain or loss so we have an example here in February 2016 Mary bought a rental house for $135,000 house 120,000 land 15,000 and immediately began renting it out in 2021 she rented it all 12 months for a monthly rental fee of $1,125 in addition to her rental income of $13,500 which is the 12 times the $1,225 Mary had the following expenses mortgage interest fire insurance miscellaneous repairs real estate taxes imposed and paid maintenance that's 8,250 400 500 and 200 respectively Mary depreciated the residential rental property under Makers GDS the depreciation method this means using the straight line method over a recovery period of 27.5 years she uses table 2-2d to find her depreciation percent because she placed the property in service in February 2016 she continues to use that row of table 2-2d for year 6 the rate is 3.636% Mary figures her net rental income or loss for the house as follows she's got the total rental income which is the $1,125 times 12 that's going to be the $13,500 she subtracts out the expenses for the mortgage interest to fire insurance the miscellaneous repairs the real estate taxes the maintenance total expenses coming to then the $9,350 that gives the balance of the $4,150 she takes out the depreciation then which is the $120,000 times the rate of the $3.6 for 4,363 to come up with the net loss on the house of $213 married had a net loss for the year because she actively participated in her passive rental real estate activity and her loss was less than $25,000 she can deduct the loss on her return Mary also meets all the requirements for not having to file form she uses schedule E part 1 to report her rental income and expenses she enters her income expenses and depreciation for the house in the column for property A and enters her loss online 22 form 4562 isn't required