Rental Loss

[Christian]

An individual has come in who owns two rental properties. He actively manages them but in doing his own returns last year mistakenly deducted more than the $25,000 loss deduction. I have not seen this before and frankly do not know how to address this. I suspect the Service will note this and send him a correction notice disallowing the part of the loss over $25,00 and refiguring his liability. I assume they would allow him to carry forward any disallowed loss.  

[Lee B]

I'm curious, what software did he use to prepare his return?  It should not have allowed that to happen.

[Christian]

I did not ask. He is going to bring me the return. I made a similar error some years back but caught it myself on reviewing the return. Sorry to say ATX did not signal that anything was incorrect. Of course he has two properties and I will need to check and see if the loss is applicable to each individual unit. I do very few rental returns and the ones I do primarily show small profits each year. 

[DANRVAN]

5 hours ago, Christian said:

He actively manages them but in doing his own returns last year mistakenly deducted more than the $25,000 loss deduction.

The proper way to correct this would be to file a 1040x.

 

5 hours ago, Christian said:

I suspect the Service will note this and send him a correction notice disallowing the part of the loss over $25,00 and refiguring his liability.

 

I would not count on that.

[Lee B]

First step should be to get a transcript of last year's tax return to see the status.

[BrewOne]

Self-prepared paper return?  Anything possible there (would be willing to bet that the rental loss isn't the only thing that needs to be corrected).  I agree this is an easy catch for the IRS, but if it takes them two years or so to send out the notice, that will be to the detriment of the taxpayer.  And I agree with getting a transcript.

[jklcpa]

Is there some other item on the return with passive income that allowed more of the rental losses?  Perhaps a partnership?

I, too, am curious about whether he used software or this was hand-prepared on paper.

[Christian]

He evidently forgot or was unaware of the limitation on rental loss that is to say the $25,000 limit. Apparently the software used and I did not inquire which company did not evidence any warning with respect to the limit. I'll see about the transcript and probably will end up amending his return explaining he will need to pay some additional tax and preserving the overage for a later year. He has other investments which he ought to be able to subtract the loss from. Many thanks.

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[WITAXLADY]

won't it allow it if he says he is real estate? Marked wrong?

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