Rental Losses for Real Estate Professionals

Many of you will read the title of this article and think, “but I am not a real estate professional.”  While you may not think of yourself as a real estate professional, the IRS may consider you one based on your real estate activities.  Recognizing that your real estate activities may qualify you as a real estate professional can lead to favorable results.
Currently, deductions for losses from rental activities (an otherwise “passive activity”) are limited to $25,000 (or less) if the taxpayer “materially participates” in the activities, subject to a phase-out at $150,000 of modified adjusted gross income.  However, as a “real estate professional” you may use your rental losses as offsets against your non-passive income.  This is one exception that demands a closer look.

To qualify as a “real estate professional” more than one-half of the personal services you perform must be in a real property trade or business in which you materially participate and in which you perform more than 750 hours of personal services during the taxable year.  “Personal services” generally means “any work performed by an individual in connection with a trade or business” such as direct involvement in the day-to-day management or operations of the activity.  A real property trade or business is “any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.”  “Material participation” is defined as involvement in the operation of the activity that is regular, continuous, and substantial.

Put simply, taxpayers who do spend their time working with investment properties should reconsider their status and determine their eligibility to convert their passive rental losses to fully deductible losses.  If you are engaged in a real estate business, and you own rental properties that operate at a loss, you should consider whether you qualify as a “real estate professional”; and, if so, consider making the election to treat all interests in rental real estate (including such interests held as a limited partner) as a single rental activity (which would allow you to consolidate all your time spent for the purpose of meeting the 750 hours test).  You may find that you could obtain significant tax savings.

— Bruce Royal


Posted in Real Estate / Property  |  Leave a comment

Leave a thought...