Schedule E Information For Losses from Rental Real Estate Activity Not Carried Over to Line 17 of Form 1040

In completing Schedule E, Losses from Rental Real Estate Activity, the information entered does not carry to Line 17 of Form 1040. 

Rental losses are considered `passive’ income and are subject to the rules for claiming passive losses. The general rule is passive losses are only allowed to offset passive income. There is a special allowance for rental real estate with active participation of up to $25,000. The special allowance phases out for higher income taxpayers. The special allowance is not available to taxpayers filing Married Filing Separately if they lived with their spouse at any time during the tax year. Rental income is not considered passive for real estate professionals, and real estate professionals are not limited on losses regardless of income. 

To determine why rental losses are not allowed
 
1.Determine if the rental is marked as active.
a.Under the Attached Forms list, double click the SCH E PG 1 that includes the rental.
b.Click the Ctrl-W Wksht box for the rental, and then click the Worksheets Button.

 
c.Is the ‘Active Participation’ Indicator marked?

i.Yes: Continue to the next step.
ii.No: The special allowance for rental real estate requires active participation. The losses are not deductible.
 


2.Determine if the Modified AGI is higher than the limitation.
a.Under the Attached Forms list, double click FRM 8582.
b.Compare the amount on Line 7 to the amount on Line 6. Is the amount on Line 7 less than the amount on Line 6?

i.Yes: The taxpayer is not completely phased out of the special allowance for rental real estate with active participation. There may be a partial phase out limiting the loss. The allowed loss calculates on Line 10. Continue to the next step.
ii.No:  The taxpayer’s income is too high to claim the special allowance for rental real estate with active participation. The losses are not deductible.
 


3.Determine if the taxpayer is Married Filing Separately and lived with their spouse at any time during the tax year.
a.Under the Attached Forms list, double click Client Data.
b.Is Filing Status set to 3 (Married Filing Separately)?
i.Yes: The special loss allowance is reduced to $12,500. If the check box for If MFS, did you live together at ANY time during the tax year is also checked, no special loss allowance is allowed.
ii.No: Continue to the next step.
 


4.Determine if all investment is at risk.
a.Under the Attached Forms list, double click the SCH E PG 1 that includes the rental.
b.Click the Ctrl-W Wksht box for the rental, and then click the Worksheets Button.
c.Is the ‘All Investment at Risk’ Indicator marked?
i.Yes: Continue to the next step.
ii.No: The allowed losses are limited to the At-Risk Limited Loss amount. The At-Risk amount is calculated on Form 6198.
 

5.There may be an issue with the Schedule E itself. Deleting and recreating the Schedule E may correct the issue.
 

Exceptions to the passive loss limitations
 
1.Real estate professionals are not subject to passive loss limitations. To indicate the taxpayer is a real estate professional:
a.Under the Attached Forms list, double click the SCH E PG 1 that includes the rental.
b.Click the Ctrl-W Wksht box for the rental, and then click the Worksheets Button.
c.Check the ‘Real Estate Professional’ Indicator check box.
 
2.Rental property that is disposed of during the tax year is not subject to passive loss limitations. Losses, including a carryover for passive losses from prior years, can be deducted. To mark a property as disposed of:
a.Under the Attached Forms list, double click the SCH E PG 1 that includes the rental.
b.Click the Ctrl-W Wksht box for the rental, and then click the Worksheets Button.
c.Check the ‘Current Year Disposition’ Indicator check box.
 
 
For more information, see IRS Form 8582 Instructions.