Net Operating Loss for Rentals

[lyle12]

Jurisdiction

New York

I own 2 rental properties which generated losses in years 1,2 and 4 of existence.

Year 1 was 2017 which I filed an incorrect tax return on. I am getting reading to submit a corrected return for 2017.

I have not filed taxes from 2018 thru 2022 because I knew I would not have any taxable income. (Retired - income comes from Dividends and interest). I am preparing 2018 – 2022 returns now.

I believe I am entitled to NOLs after reading IRS publication 536 on Net Operating Losses for Individuals.

Can I carry any of the NOL's back to 2016 (I was a w-2 employee back then)? Or should I just carry the NOLs forward at this point?

I did NOT read anything in IRS Publication 536 about time limitations.

 

[army judge]

If you require tax advice, don't delude yourself by seeking it from anonymous entities slithering across the interwebz.

I suggest you seek the guidance, counsel, and direction of a CPA and/or tax attorney.

If you persist in seeking FREE tax advice, you might end up losing your FREEDOM and/or your money.

There are many illicit schemes and scammers slithering across the interwebz.

 

[flyingron]

You can't go back more than three years on filing. You should have been filing anyhow. YOU HAD INCOME. You were taking in rents. The fact your expenses exceeded the income made no tax due didn't eliminate your obligation to file.

Note that rentals are almost always passive activities and hence you can't take the loss against active income. Had you filed timely, you'd be able to possibly roll the losses forward to offset future passive income.

I'd suggest getting a tax professional (one who works year round, not those who set up between Feb-April). Just doing depreciation, let alone all this loss carrying forward is a bit beyond what most people can do (and depreciation isn't optional either).

I'm sure @Tax Counsel will come and explain this in more detail.

 

[Tax Counsel]

I own 2 rental properties which generated losses in years 1,2 and 4 of existence.

Year 1 was 2017 which I filed an incorrect tax return on. I am getting reading to submit a corrected return for 2017.

I have not filed taxes from 2018 thru 2022 because I knew I would not have any taxable income. (Retired - income comes from Dividends and interest). I am preparing 2018 – 2022 returns now.

I believe I am entitled to NOLs after reading IRS publication 536 on Net Operating Losses for Individuals.

Can I carry any of the NOL's back to 2016 (I was a w-2 employee back then)? Or should I just carry the NOLs forward at this point?

I did NOT read anything in IRS Publication 536 about time limitations.

You do need to file the returns. Dividends, interest and rent received (before rental deductions) are all part of your gross income, and it is your gross income that determines whether you are required to file a return. And I'm guessing that your gross income easily surpassed the filing requirement. What's more, you want to file the returns because that is the only way to get credit for the losses. You also run the risk that some or all of the refund carryforward would be lost if the return you are carrying it forward to has also passed the statute of limitations for a refund. The longer you wait, the less the NOLs will be useful to you. You do not get penalized for late filing if there is no tax due on the return.

Note that if you are self-employed those NOLs may reduce your income tax but it will not help you with the self employment tax (which is how self-employed persons pay their Social Security and Medicare/Medicaid taxes, known collectively as FICA taxes).

The statute of limitations to make a claim for a refund is three years after the due date of the return or 2 years after the tax is paid, whichever is later. If you owe money on a return that is past the statute of limitations for refund you may still use your loss reduce what is owed, but you don't get any refund for the excess. The net operating losss rules are explained in great detail, along with useful worksheets to help you get it right, in IRS Publication 536.

The rules for carry back of NOLS has changed over the years. The current rule is that only a NOL from some farming related income may be carried back. Currently a NOL from a rental may only be carried forward, not back.

I suggest you get help from a tax professional (enrolled agent, CPA with a master's in tax law or has extensive experience in tax law, or an attorney who has LL.M degree in taxation or has extensive experience practinging tax law) to help you get this right so you get the most benefit from those NOLs. There are a number of rules and limitations for NOLs you need to be aware of to get it right.

Unless there is some uncertainty in the law or it is very complex, an enrolled agent or CPA would be my recommendation. They typically handle more routine return filing matters better than a tax attorney as they do much more of that part of tax practice than lawyers do. Tax lawyers charge significantly more and tend to focus their practices on complex tax planning and/or in representing taxpayers with controversies they have with tax agencies, including litigation in court.

 

[lyle12]

@Tax Counsel -- Thanks very much for the detailed feedback.

I read thru the instructions on both 2017 & 2018 Net Operating losses (IRS Pub 536). It looks like I've missed the deadlines for both years. Based on what I've read I can only carry these losses forward. Which is unfortunate b/c I was in a much higher tax bracket for the years I would have been able to carry back.


I've contacted a CPA and I'm waiting to hear back. Maybe there are some work arounds or leniencies granted. Doubtful.

NOL Year Carryback year 1040-x deadline to carry back
2017 2015 – p536 says only back 2 years 4/15/2021
2018 2013 – CARES Act 5 year carry back 4/15/2022

 

[Tax Counsel]

It is indeed too late to carry any of the losses back to earlier years at this point. But you may still get some use out of them by carrying them forward.

 

[lyle12]

It is indeed too late to carry any of the losses back to earlier years at this point. But you may still get some use out of them by carrying them forward.

One issue I might run into is I did not choose to waive my carryback in a timely manner for 2017 & 2018. B/c I did not file the waiver, I cannot waive the carryback period. And I am not eligible for the carryback period. Kind of a Catch-22.

From IRS Pub 536:

Waiving the Carryback Period

You can choose not to carry back your NOL. If you make this choice, then you can use your NOL only in the 20-year carryforward period.

To make this choice, attach a statement to your original return filed by the due date (includ-ing extensions) for the NOL year. This state-ment must show that you are choosing to waive the carryback period under section 172(b)(3).

If you filed your original return on time but did not file the statement with it, you can make this choice on an amended return filed within 6 months of the due date of the return (excluding extensions). Attach a statement to your amen-ded return, and write "Filed pursuant to section 301.9100-2" at the top of the statement.

Once you choose to waive the carryback pe-riod, it generally is irrevocable. If you choose to waive the carryback period for more than one NOL, you must make a separate choice and at-tach a separate statement for each NOL year.

If you do not file this statement on time, you cannot waive the carryback period.

 

[Tax Counsel]

One issue I might run into is I did not choose to waive my carryback in a timely manner for 2017 & 2018. B/c I did not file the waiver, I cannot waive the carryback period. And I am not eligible for the carryback period. Kind of a Catch-22.

Yes, that is a problem. The tax code starts with the premise that most people would want to do the carryback, so they made that easier by making the carry back the default rule. If don't want the carry back you must attach the statement making the choice to a timely filed return or an amended return filed by the return due date. If you carryback to years where the losses will not now help you then you burn some of your NOLs. This is one reason why it can be important to file a return even in a year in which you were not required to do so.