You may feel you work for every dollar, but the IRS doesn't always see it that way. Money you earn through investment, such as dividends, interest and rental property, is usually classed as passive income. If your passive activities run in the red, there are limits on how big a loss, if any, you can claim on taxes. With rental property, one of those limits is your income.
Rental income is passive unless you qualify as a real estate professional, under the IRS definition in Publication 527. Normally, you deduct passive losses from other passive income and carry any remaining red ink forward to next year. If you're actively involved in managing your rental property, you can write off up to $25,000 in losses from your non-rental income. If you're married and filing separately, the most you can deduct is $12,500.
If you're married and filing jointly, the $25,000 deduction starts to shrink once your modified AGI tops $100,000. When it hits $150,000, the deduction disappears completely. MAGI is adjusted gross income with a number of tax breaks erased. To calculate MAGI, you take your AGI and add back the deductions for IRA contributions, interest on student loans, the tuition tax deduction and several other items. You use AGI to figure your taxable income, but MAGI determines your qualifications for a number of deductions.
Figuring the effect of MAGI on your write-off is fairly simple. If your MAGI is under $150,000, subtract $100,000, then take half of whatever is left. If, say, you and your spouse report a $140,000 MAGI, you subtract $100,000, leaving $40,000, then divide that in two. That gives you $20,000. Subtract that from your passive-loss write-off and you can claim $5,000, tops. Any losses above that figure you carry forward to next year's tax forms.
If your rental investments qualify for low-income housing credits, there's no phase-out on your deduction, no matter how high your MAGI. Neither does property that qualifies for a commercial revitalization deduction, given for development in certain commercial districts. If you qualify for rehabilitation investment credits, you still get the phaseout, but it doesn't kick in until $200,000. If your real-estate portfolio puts several of these rules in play, IRS Publication 925 details how to figure your maximum rental write-off.