What Proper Investors Should Know About Deducting Rent Losses

Investment Tips

If you are a real estate investor, it’s important that you know the losses you can potentially deduct and how you might approach the deductions. Many of my real estate investor clients ask me, “Karla, I am not collecting my rent. What can I do?” This piece should answer that question for readers wondering the same.

Table of Contents

Losing Rent

If rent is not being paid on time or in full, that is income lost. You may be in a situation where you’ve gone six or seven months without receiving rent from a tenant. Consequently, you also do not have that income to report on your taxes. You still have the expenses, mortgage interest, property taxes and insurance, though, right? If you are in this boat or are going through a similar situation as an investor, you can likely take these and other expenses as a tax write-off.

Track Expenses

In order to even consider this option, you should be tracking all expenses. Unfortunately, the loss of rent is not a tax deduction. I know how this must feel and you may be wondering “How could that be?” The reasoning behind this is that if you don’t report the income because rent is not paid, that is how it becomes a loss.

Let me give an example of that. Let’s say that you have a place you rented out for $1,000 a month, which would equate to $12,000 a year. Now, let’s say you only proceed in the red for four months of this year; that means you only have to report $4,000 of rental income and the remainder of the $8,000 rental income will not be reported—meaning you’re probably going to trigger a rental loss. However, your rental losses are going to be capped depending on how much income you make; so if you make over $100,000 when filing jointly with a spouse, you will likely not receive any of those rental losses. If you’re in this position, you can work within the tax code to suspend rental losses, so you can pick them up later on when your rental income returns to regular levels.

Review Income

Before I do, the other option for addressing the losses is to bring your income below the $100,000 threshold for joint filers to be able to take up to $25,000 in losses. If you’re saying to yourself, “Karla I can’t do that. My income is way too high for me to bring it down that low.” That’s when you have to think about becoming a real estate professional. You might already have a W-2 job and be an investor, so what would become a real estate professional look like?

A real estate professional is an individual who materially participates in their real estate, which means they manage real estate, select their own tenants and they’re doing the majority of the work required by the real estate-owned. What does that mean for you? That means that you could get qualified as a real estate professional by logging the time you spend on all your real estate, tracking your expenses from managing yourself and also tracking who else does work for you. Once you are a real estate professional in the eyes of the IRS, then your losses will not be limited and you could take 100% of your losses and recoup some of your lost revenue.

With all this in mind, remember the key takeaways when experiencing rent loss. Try not to be upset over the loss of rent. I know it feels like a lot, but there’s a way to handle it. Track all of your expenses to be able to maximize those deductions. And lastly, you might consider qualifying yourself as a real estate professional—if you choose not to claim losses down the road. As a real estate investor, there are options to explore that can help you preserve your losses and, in turn, deduct them.