Rental losses Passive?

[Janitor Bob]

My client has two rental homes that she had previously actively maintained, so any losses were active as opposed to passive. However, beginning in 2012, client was spending the majority of her time at a new job out-of-state....only coming home to work on the rentals approx. one weekend each month. I am thinking that because of this, the losses (if any) on these rentals will beconsidered passive and can not be used to offset W-2 income?

[Janitor Bob]

However, she did actively participate, so she can use up to $25,000 of rental losses as offset to W-2 income.

[michaelmars]

ITS a passive active with active participation. yes to the 25,000 assuming her overall income isn't over the limit

[Guest Taxed]

Be careful, watch the AGI because you may not be able to offset ordinary income. You first have to offset passive income and then carry forward. Hopefully the software will do that for you.

[Janitor Bob]

Thanks...yes, she is well below the income limit. However, now I have new twist. The client informs me that the roof on one of the rental properties had a huge leak (storm damage to the roof) near the end of 2011 and was vacant for all of 2012. She was doing some work on the roof and other repairs in 2012, but it essentially was not, in her opinion, fit for a renter at any point in 2012...so she turned away a few prospective renters this past year. Does this disqualify it as rental activity for 2012? For 2012, she will have zero rental income and only a few expenses (depreciation, utilities, minor roof tarping, etc). I do not want to claim this rental loss for 2012 then be told by IRS if audited that since no renters and not seeking renters in 2012, that the 2012 rental loss in disallowed. If I cannot claim this rental activity for 2012, what do I do with the Sce E and expenses?

[Guest Taxed]

I had a similar situation with a client few years back. One of the units was totally trashed by a previous tenent and it took him a full year to rent it out. Because this client had rented out that unit in the previous 5 years and it was just that one year there was no rental income we did the Sch E but for rent put 0. Also we attached a copy of the police/insurance report showing damage to the unit so that the IRS would not question as to why it was not rented. I am assuming that the improvements that your client will be made will be amortized in the return instead of claiming it as repairs?? In my situation we amortized since the fellow had to rip out all the dry wall etc.

[imjulier]

I just had a similar situation under audit by the IRS. Repair expenses were high based on low rental income so it was selcted for audit. TP handled the meeting with the IRS themselves and stated that becuase of the repair/remodel work being performed that it was not available for rent. IRS excluded all the expenses related to that period but agreed to put mortgage interest and property tax on Schedule A as a second home. I chose to not fight it since most of the expenses could still be recovered in future years as depreciation. I told the taxpayer they would have to pay the tax now but would recover most of it later.....just a shell game by the IRS. Hope this helps.

Julie