Are Real Estate Losses Tax Deductible?

Question: Can real estate investment losses be deducted from your taxes like stock losses? – Joe L. in Utah

Jacob Dayan, Co-Founder of Community Tax, responds…

Hi Joe,

Great news! If it is an investment property not used personally, losses may be deducted under special rules. There are two different ways you can deduct the real estate losses, depending on your situation.

Scenario No. 1: Offsetting capital gains if real estate losses are passive income

If the loss is considered to be from a source of passive income, which is most common, your loss may be used to offset any other capital gains that year. Then, up to $3,000 may be deducted from ordinary income, $1,500 if you are married filing separately. After that limit, your loss will be carried over to be used in subsequent tax returns until it is all used up.

Scenario No. 2: Deduction for losses if you work in real estate

If you actively participate in or are a real estate professional, you are able to deduct more of a loss on the current year than if your real estate investment is passive income. There are special rules that define active participation. However, if you meet those requirements and own at least 10% of the property, you can deduct up to $25,000 of loss as long as your modified adjusted gross income is less than $100,000. If your income exceeds it, the deduction is reduced from there.

Consult with a tax professional

As you can see, the answer to your question truly depends on the specific facts and circumstances of your situation and it can get complicated.  I would recommend consulting with an experienced tax preparer to assist you in completing your tax returns to take advantage of any deductions you are entitled to.