This topic could have a huge tax implication if you receive rental income and you incur a loss. Losses are common in years with significant expenses or vacancy for a long period.
There are other tax implications on repairs depending on their significance. (We will cover the tax implications of improvements vs. repairs in another entry).
Why is it important to understand the difference of passive vs non-passive loss? IRS limits your loss if the activity is passive.
There are two types of activities that are considered passive:
Real Estate Professional:
If you invest in real estate, the IRS requires a tax payer (or spouse) to pass the Real Estate Professional test. In short, half of either the taxpayer’s or spouse’s time must be dedicated to real estate related activities (i.e. real property development, construction, acquisition, conversion, rental operations, management, leasing, or brokerage) AND must materially participate in real estate more than 750 hour in the year. As a side note, if you are an employee in a real property activity business, you must own at least 5% of the business to count the hours spent in the activity.
If you or your spouse meet BOTH requirements above, the activity is no longer considered passive and losses are fully deductible. Otherwise losses are reported on form 8582 and subject to limitations.
A married couple filing jointly (taxpayer is a W-2 employee and spouse is stay at home mom) own a rental property and expect a loss due to additional repairs in the year. To ensure the IRS won’t limit their loss, the spouse actively manages the couple’s rental home and separately meets both tests.
Juan M. Caballero
“I have always been driven to buck the system, to innovate, to take things beyond where they've been.” – Sam Walton