Your Commercial Real Estate Investors Insurance Policy and the Rental Real Estate Loss Allowance: What You Need to Know
Your rental property provides passive, long-term revenue that supplements your normal income. Many landlords rely on monthly rental payments to help them meet other financial obligations. Violent weather, pest infestations, and other severe damages can make your property temporarily unsafe to inhabit. Your commercial property insurance will help cover some of the expenses, but most policies do not replace all lost rental income.
The Rental Real Estate Loss Allowance
The Rental Real Estate Loss Allowance is a federal tax deduction. Usually, the IRS does not permit a taxpayer to deduct business losses from passive activities, like rental properties. This allowance is an exception.
If you are a landlord, but not a professional real estate agent, and experience a loss of rental income, you may be able to deduct up to $25,000 from your tax bill for every year your property is not being used. The actual amount you receive is adjusted based on your adjusted gross income.
To claim the deduction, submit Form 8582 with your annual tax returns.
Do Insurance Payouts Affect the Allowance?
Rent loss insurance is a common addition to a commercial real estate insurance policy. Landlords are able to recover a portion of lost rents if their property becomes unprofitable due to disaster.
You are permitted to take the rental loss deduction, even if you receive a settlement from your insurance company. However, you will not be able to take the full deduction, because you will not be able to claim the portion covered by the payout.
For example, an electrical fire puts your two-unit condo out of commission for several months. During this time, you miss out on $5000 in rent payments. If your insurance pays you $2000 for lost income, you will only be able to claim $3000 from the tax deduction.
The Information You Need to Make the Right Choice
The Rental Real Estate Loss Allowance, in combination with an up-to-date rent loss policy, can fully cover your losses when your rental property isn’t paying off.
Contact Ramey King Insurance. Our professional staff will answer your questions and help you customize an insurance plan that protects your investment and your income.