Can I Deduct My Rental Property Losses Against W2 Income?

So my husband and I both have regular jobs with combined income around $650k. We decided to get into the rental property game last year and purchased our first place in October 2023. We've had some issues getting it rented though - it sat empty for like 2-3 months before we finally found tenants in January 2024. During that time, we bought new appliances, installed blinds, did some minor repairs, etc. and obviously didn't have any rental income coming in. I'm working on our taxes now and trying to figure out if we can use these rental property losses to offset some of our W2 income? We made all the decisions about the property ourselves - finding tenants, deciding on rent amount, handling the maintenance calls, etc. I've been reading the IRS website and saw something about "active participation" allowing us to deduct up to $25k of rental real estate losses against non-passive income (our W2 earnings). But I'm confused about whether we qualify since we have high incomes. Do we meet this "active participation" requirement? And can we actually use these rental losses against our regular income? Any help would be so appreciated!

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18 comments

Liam McConnell

•8M

Yes, you're on the right track about "active participation," but there's a critical income limitation that affects your situation. While you do qualify for "active participation" by making management decisions like tenant selection and rent amount, the ability to deduct rental losses against W2 income phases out when your modified adjusted gross income (MAGI) exceeds $100,000. The deduction is completely eliminated when MAGI exceeds $150,000. Since your combined income is around $650k, you unfortunately won't be able to take the $25,000 exception to offset your W2 income. However, these losses aren't gone forever! You can still carry them forward indefinitely until you either: 1. Have passive income from other sources to offset them 2. Sell the property, at which point you can use accumulated losses Also, one other consideration: if either you or your husband qualifies as a "real estate professional" (750+ hours per year working in real estate businesses), different rules would apply. But this seems unlikely given your salaried positions.

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Liam McConnell

•8M

You track carried forward losses using IRS Form 8582 "Passive Activity Loss Limitations" each year. You'll need to keep records of your passive losses and complete this form annually until the losses are used up. The form will calculate how much, if any, of your passive losses you can use each year and how much carries forward. The IRS doesn't automatically track these for you, so maintaining good records is essential. The good news is that most tax software handles this tracking for you if you use the same program year after year. Just make sure to keep copies of your tax returns and supporting documents for at least 7 years.

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CosmicCaptain

•8M

I was in almost the EXACT same situation last year! Making decisions on my own about which tenants to accept and setting rent prices seemed like work, but apparently not enough to count as a "real estate professional" for tax purposes. I spent hours trying to figure out if I could deduct my losses, only to eventually discover that my regular income was too high. After a ton of frustration, I discovered taxr.ai (https://taxr.ai) which really helped me understand my rental property tax situation. Their AI analyzed my rental property documents and explained exactly what I could and couldn't deduct. It confirmed I couldn't take the losses against my W2 income due to the income limitations, but it showed me some deductions I was missing and how to properly track my suspended losses for future years. Honestly, it saved me from making some pretty big mistakes on my taxes. The suspended losses tracking alone was worth it.

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CosmicCaptain

•8M

It actually analyzes your documents using AI - you upload receipts, property records, lease agreements, and it extracts the relevant tax information. It doesn't file your taxes for you, but it gives you clear guidance on what to do with each expense and how to categorize everything properly. It's basically like having a tax pro explain your specific situation. The analysis has been really accurate for my rental property situation. I actually had my CPA review what it suggested, and he was impressed with how it caught some nuanced depreciation issues that many preparers miss. The suspended loss tracking was spot-on according to him, and it showed me exactly which form to use to track these losses year after year.

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Fatima Al-Maktoum

•8M

I have to update my skeptical comment about taxr.ai! I decided to try it with my own rental property documents, and I'm genuinely impressed. It caught some depreciation issues with my property improvements that I had completely missed. It definitely knows the rental property tax rules in detail and explained exactly why my losses couldn't offset W2 income (same high income situation as OP). What really helped was how it explained the carried-forward losses in simple terms - something my previous tax person never really clarified. I now understand exactly how these suspended losses will help me in the future. Worth checking out if you're dealing with rental properties.

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Dylan Mitchell

•8M

Have you tried calling the IRS to get clarity on this? I was in a similar situation last year (though with a lower income) and wanted to confirm my understanding directly with them. After spending HOURS trying to get through their regular line with no luck, I found Claimyr (https://claimyr.com) which got me connected to an actual IRS agent in about 15 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent confirmed everything about my rental property loss situation and helped me understand exactly how to track my suspended losses for future use. Saved me from potentially making a big mistake on my taxes. They can't give tax advice per se, but they clarified the rules in a way that made it obvious what I needed to do.

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Dylan Mitchell

•8M

It uses a combination of technology and timing to navigate the IRS phone system more efficiently than you could manually. It doesn't "cut the line" - it just automates the calling process and notifies you when a connection is established so you don't have to sit on hold for hours. It's basically like having a robot assistant wait on hold for you. The service is completely legitimate. It doesn't access any special IRS channels that aren't available to the public - it just makes the existing channels more efficient to use. Think of it like having someone stand in a physical line for you until it's almost your turn. The IRS knows about these services and hasn't taken any action against them because they're just helping people connect through the regular channels.

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Dmitry Petrov

•8M

I need to apologize for my skeptical comment about Claimyr. I decided to try it yesterday after struggling to get through to the IRS for THREE DAYS about my rental property question. I was connected to an IRS representative in about 20 minutes! I couldn't believe it actually worked. The IRS agent was super helpful in explaining exactly how the passive loss rules work with my income level and confirmed I need to carry forward my losses until I either have passive income or sell the property. They walked me through exactly which form to use to track this (Form 8582). I was definitely wrong about this service - it saved me hours of frustration and I actually got the answers I needed directly from the IRS.

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StarSurfer

•8M

One thing nobody's mentioned yet - if you plan to sell the property in the next few years, those accumulated passive losses become fully deductible in the year you sell (assuming it's a properly documented taxable sale). This was a HUGE tax benefit for us when we sold our rental last year after carrying losses for 5 years. Also, make sure you're tracking depreciation correctly - even if you can't use the losses now, you want your basis calculation to be accurate for when you eventually sell.

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StarSurfer

•8M

Yes, you absolutely must take depreciation on rental properties whether you want to or not. The IRS considers it "allowed or allowable" which means even if you don't claim it, they'll act as if you did when you sell the property. Residential rental properties are typically depreciated over 27.5 years (straight-line method). You can only depreciate the building value, not the land value, so you'll need a reasonable allocation between the two. Most county tax assessments separate these values, which is an acceptable method for determining the split. If you've never taken depreciation but should have, you generally need to file a Form 3115 to correct this. Not claiming depreciation can create a mess when you sell, as the IRS will reduce your basis by the depreciation you should have taken, potentially creating a larger gain.

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