If you own rental property, you may be entitled to tax deductions on it, including a deduction on any losses you suffered on the property. The Internal Revenue Service allows you to deduct up to $25,000 of rental property loss as of July 2011; the exact amount of loss you may deduct depends on your adjusted gross income. If you have more losses than you are allowed to deduct, you may carry them forward until you have deducted all losses or sold the property.
Year of Sale
If you have unallowed losses every year that you own a rental property, you can take a deduction for all of the loss that you carried forward in the year that you sell the property. For example, if you have unallowed losses for five years, you can deduct all five years' worth of losses if you sell the rental property within the last year. There is no limitation on how many years you may carry your losses forward as of July 2011.
If your adjusted gross income is too large to deduct all of your loss one year, you may carry the unallowed loss forward the next year. If you make less money the next year, you must claim up to the maximum allowable loss and carry forward any loss that you still have not claimed again. As long as you own the rental property, you may carry loss forward if you are unable to claim it.
If you have losses of $25,000 or less, you must deduct them in the year of loss unless your adjusted gross income is too high for you to get the entire deduction. In this case, you can carry forward the unallowed amount for an indefinite period of time as described previously. If your income is too high for you to take the maximum deduction, carry forward any amount over the maximum allowed deduction for your income level. You cannot take any deduction if your adjusted gross income is over $150,000 for the year.
If you have multiple rental properties, you must allocate your losses among all the properties. If you make a profit on any of the properties, subtract the profit from your total losses to determine your new carry-over amount. If you sell one property, you can deduct the part of the loss carry-over allocated to that property and must redistribute your carry-over among your other properties. Most people who own more than one rental property consult a CPA to help them figure out allocation rules.