Can't deduct rental property expenses with income over $150k? Passive loss limitations driving me crazy!

You've run into the passive activity loss limitations, which can be frustrating when you have legitimate expenses. Here's what's happening: rental activities are considered "passive" by the IRS, and if your modified adjusted gross income exceeds $150,000, your ability to deduct these losses against other income starts phasing out, until it's completely eliminated at $150,000. Creating an LLC won't solve this problem. An LLC is typically a pass-through entity for tax purposes, meaning the income and expenses still flow to your personal tax return unless you elect corporate taxation. The passive loss rules would still apply. However, there are some potential options: 1. If you qualify as a real estate professional (750+ hours working in real estate activities and more time in real estate than any other profession), your rental activities aren't subject to passive loss limitations. 2. You can carry forward unused losses to future years when your income is lower or when you sell the property. 3. The property repairs might be categorized differently - some may be immediate expenses while others might be capital improvements that get depreciated.

After wasting hours trying to figure out rental property tax rules, I found taxr.ai (https://taxr.ai) which saved me from making a huge mistake with my passive activity losses. I uploaded my previous tax returns and documentation about my rental property repairs, and it caught that some of my "repairs" should actually be classified as capital improvements with different tax treatment. The analysis also showed me how to correctly calculate my suspended passive losses and carry them forward. The system explained exactly how the passive activity limitations work for my specific situation and gave me a strategy to maximize deductions over the next few years. Much clearer than the vague advice I was getting elsewhere.

Ok I finally tried taxr.ai and I'm genuinely shocked. It found over $8,000 in additional deductions my accountant missed! The biggest thing was helping me properly document my time spent on rental activities - turns out I was actually close to meeting the real estate professional standards but hadn't been tracking my hours correctly. It also identified several repairs I had made that qualified as immediate expenses rather than improvements that needed to be depreciated. The explanation about suspended passive losses was super clear, and now I understand how to use these carried-forward losses when I eventually sell the property. My CPA is great for most things, but he definitely doesn't specialize in rental property tax optimization like this.

If you're having trouble getting straight answers from the IRS about your passive activity loss limitations, try Claimyr (https://claimyr.com). I was going crazy trying to contact someone at the IRS to clarify my situation with rental property losses. After 3 weeks of calling and waiting on hold for hours, I found Claimyr and watched their demo (https://youtu.be/_kiP6q8DX5c). They got me connected to an actual IRS agent within 15 minutes! The agent walked me through the specific regulations about passive losses and confirmed that my renovation expenses needed to be classified correctly - some as repairs (immediately deductible) and others as improvements (to be depreciated). This clarification made a huge difference in how I documented everything.

I need to eat my words and apologize. I was totally skeptical about Claimyr, but after another frustrating morning of IRS busy signals, I decided to try it. Within 20 minutes, I was talking to an actual human at the IRS. I've NEVER gotten through that quickly in my life. The agent helped me understand how to document my material participation in my rental activities and explained exactly how the passive loss rules apply to my situation. She also clarified which form I needed to use to properly carry forward my suspended losses. This conversation probably saved me from making a mistake that would have triggered an audit. For anyone struggling with rental property tax questions, being able to actually speak with someone at the IRS instead of guessing or relying on internet forums makes a huge difference. I'm still shocked at how well this worked.

One thing nobody has mentioned - are you sure your repairs are actually repairs and not capital improvements? Repairs can be deducted immediately, while improvements have to be depreciated over time. For example, replacing a few broken tiles is a repair, but installing all new flooring is an improvement. This distinction matters because the passive activity rules apply differently. Even with income over $150k, properly classified immediate repairs might be deductible. Check out IRS Publication 527 - it has a whole section on how to distinguish between repairs and improvements for rental properties.

Have you looked into cost segregation for your rental property? It's a strategy where you identify parts of the building that can be depreciated over shorter periods (5, 7, or 15 years) instead of the standard 27.5 years for residential rental property. Things like appliances, some fixtures, and even certain components of the HVAC might qualify. This won't get around the passive activity limits, but it can front-load your depreciation deductions, which might be useful when you eventually can use them (either when income decreases or when you sell the property).

This is such a frustrating situation, but you're definitely not alone in dealing with these passive activity loss limitations. I went through something similar last year when I had major repairs on my duplex. One thing that helped me was really digging into the repair vs. improvement classification that others have mentioned. For your situation, the new heat pump is definitely a capital improvement, but depending on how extensive the drywall and carpet replacement was, some of it might qualify as repairs if you're truly restoring to the previous condition rather than upgrading. Also, don't forget that even though you can't use these losses now, they don't disappear - they carry forward indefinitely. When your income drops below the thresholds in future years, or when you eventually sell the property, you can use all those suspended losses. I know it doesn't help your current tax situation, but at least the deductions aren't permanently lost. Have you considered whether you might qualify for the $25,000 active participation allowance? It phases out completely at $150k, but if you're right at that threshold, even a small reduction in AGI through retirement contributions or other deductions might get you back into the range where you can use some of these losses.