Sometimes you may sell a property in a portfolio that has other property still in it. When you do, its excess deductions or net income stay with the rest of the property in the portfolio, whether the sale was taxable or not.
Excess deductions and a non-taxed property sale
Most of the time there's no tax to pay when you sell a residential rental property and make a gain. Having a non-taxable sale sets what you can do with excess deductions for your portfolio property.
When you've sold all the residential rental property in a portfolio and any sale was not taxed the excess deductions are:
- transferred to another residential rental property (if you have one)
- carried forward from year to year if you've no residential rental property to transfer them to.
When you get more residential property you transfer your unused excess deductions to it. (These are the ones you've carried forward.) You then:
- treat them as transferred to that individual property or portfolio.
- deduct them when you earn income from your residential rental property.
Excess deductions and a taxable property sale
Sometimes there is tax to pay when you sell your residential rental property. This could be when you sell within the bright-line period.
If you sell all the property in a portfolio and each sale was taxable you can use your excess deductions. You can use them against:
- the net income from the property sales
- your other income, such as salary and wages.
If your excess deductions are more than your other income they become part of your net loss. You can carry them forward and use them against other income in future years like any other net loss.
You cannot include any transferred excess deductions from another residential property. If you have transferred excess deductions make sure you remove them from your excess deduction total before using them against your other income.
Wang Shu owns a portfolio of two residential properties. She has not owned other residential rental properties before.
In the 2019-20 income year, Wang Shu sells both of these properties. Both sales are taxed and the net income from the sales is $10,000.
In the same year Wang Shu also has:
- gross rental income of $20,000 from the properties
- rental deductions for the properties of $35,000
- a salary of $70,000.
Wang Shu has a total of $30,000 residential income from the portfolio for the year (the gross rental income and the net rental income from the sale of the properties).
Wang Shu can use $30,000 of the rental deductions against her residential income.
Because the sales of both properties in the portfolio were taxed, the remaining $5,000 of rental deductions can be used against Wang Shu’s salary income.
If the sale of only one of the properties had been taxable, any excess deductions would remain. They could not be used against Wang Shu's salary income. Wang Shu would have to carry them forward into the next tax year and use them against her future residential income.