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Update: How to Deduct Real Estate Rental Losses

10 December 2015

In July, we provided you with details on what the differences are between passive and nonpassive real estate activities, as defined by the IRS, and how this difference can limit the deductibility of certain losses on real estate owned by a taxpayer for rental.

This month, we offer guidance on how you may be able to maximize your deductions on real estate rental losses. Contact us to find out the best approach for your individual situation.

1. Passive v Nonpassive

Real estate rental activity is considered passive per se by the IRS, and losses from passive activities cannot be offset against income from nonpassive activities.

2. Exceptions

Active Participation—If you make key management decisions regarding your real estate properties, and your modified adjusted gross income (MAGI) is less than $150,000, you may be eligible to deduct up to $25,000 in “passive” real estate losses (see Real Estate Losses – Can You Deduct Them? for more details).

Material Participation—While “Active Participation” does not change the definition of the real estate activity (it is still considered “passive”), “Material Participation” renders the activity “nonpassive.” “Material Participation” requires that you devote more than 750 hours per year to your real estate activities.

3. Real Estate Professionals—Do You Qualify?

For real estate professionals, the per se “passive activity” designation for real estate rental activity is not applicable. If real estate-related activities in which you materially participate represent more than 50% of your total personal services, and total over 750 hours in aggregate annually, you may be able to qualify as a real estate professional.

One benefit of qualifying as a real estate professional is the ability to treat all of your real estate activities as a single activity under Internal Revenue Code Sec. 469(c)(7)(B), rather than having to document your material participation in each individual property. Call us for a consultation to determine whether you qualify!

4. Tips

  • Document the time you spend on real estate activities–consulting with architects and/or contractors, site inspections, reviewing potential tenants, etc. This documentation can help demonstrate to the IRS that you are materially participating in managing your properties.
  • While the IRS does not require records to be contemporaneous (Regulation 1.469-5T(f)(4)), such records are best. Alternatives can include the identification of services performed during the time in question and a reasonable approximation of the hours spent (these should be backed up by appointment records, calendars, and/or narrative summaries).

In summary, if you qualify as a real estate professional, this may provide you with the best path to maximizing the deductibility of your real estate rental losses.

The next step? Call us!

All of these tips represent general advice. When it comes to tax planning, one size does not fit all. Rigby Financial Group provides highly individualized, specifically tailored tax plans for individuals and businesses. Please contact us for advice and assistance in creating a specialized plan that suits your unique situation.

Disclaimer:

The information presented here is not specific to any individual’s personal circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.