Published by AE Tax Advisors Team • 2026-05-22

Unreported Rental Losses Unlocked -- $62,000 Recovery

The Client

Stephanie Nguyen, a software engineer in Seattle, Washington, earned $195,000 from her W-2 job and owned two rental properties generating combined rental income of $36,000. However, after mortgage interest, property taxes, insurance, repairs, and depreciation, the properties actually produced net losses of $28,000 per year.

The Problem

Stephanie's prior CPA had been reporting the rental income but not properly claiming the rental losses because he believed all rental losses were suspended under passive activity rules. In reality, Stephanie qualified for the $25,000 rental loss allowance because her modified AGI was under the $150,000 phase-out threshold in the years in question (she had received a significant raise in recent years). Three years of rental losses totaling $84,000 had gone unclaimed.

Our Strategy

We prepared amended returns for three tax years, properly applying the passive activity loss rules under IRC Section 469. For the earlier years when Stephanie's MAGI was under $100,000, she qualified for the full $25,000 rental loss allowance. For the transitional year, we calculated the phased allowance. We also identified $12,000 in unclaimed repair expenses across the three years.

The Results

The three amended returns recovered $62,000 in overpaid federal and state taxes. Stephanie also now has properly calculated suspended losses from recent years that will be released when she sells one of the properties. Going forward, we are tracking her MAGI to maximize allowable rental deductions each year.

Key Takeaway

Many taxpayers with rental losses are told those losses are permanently unusable. In reality, the passive activity rules provide a $25,000 annual allowance for active participants with MAGI under $150,000. Improperly suspended losses can be recovered through amended returns.