Tax Tip – Rental Real Estate Losses

Tax Tips provided by Don Fitch, CPA

Rental losses are subject to special passive activity rules with respect whether they are deductible and the extent to which they may be deducted.

Passive activity losses are generally deductible only against passive activity income. There are two types of passive activities. The first type is rental activities. The second type is any trade or business in which you do not materially participate. These passive loss limitation rules apply to individuals, including individuals in a partnership or S corporation.

There is a special exemption for rental real estate, the so-called $25,000 special allowance, if you meet certain criteria. If your modified adjusted gross income is less than $100,000, you may deduct up to $25,000 in rental real estate losses, if you actively participate. Active participation requires being involved in meaningful management decisions. It also requires an ownership interest of more than 10 percent.

In addition, rental real estate losses of a Real Estate Professional

Brenda Fitch Real Estate Professional
Brenda Fitch Real Estate Professional – Indian Wells, CA

are completely exempted from the passive loss limitation rules where that professional materially participates in the rental activity. Material participation means working on a regular, continuous and substantial basis in the operations of a business. You are considered to be materially participating if, and only if, you meet one of seven hourly tests. If you meet any one of the seven tests, you are considered as materially participating regardless of your ownership interest. If you do not meet any of the tests, you cannot materially participate and losses are not deductible against nonpassive income.

It can sometimes be advantageous to elect to group related entities into one single larger activity. If you work more than 500 hours in that larger activity, losses from all the entities are nonpassive, even where you perform no work whatsoever in one or more of the entities. However, once the grouping decision is made, you must follow that same grouping consistently in all future years. Thus, the initial grouping or non-grouping needs to be a very carefully thought-out decision, considering both current income and losses as well as what might potentially happen in future years. Generally, a rental activity cannot be grouped with a trade or business, even if a business and a rental activity form an appropriate economic unit. However, there are exceptions to this rule as well.

As you can see, the rules relating to rental real estate losses are quite complicated and dependent on the facts of each case. Please contact the office of Don Fitch Accountancy at (760)567-3110 or Email if you have any questions or would like additional information.

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This blog post is intended to serve solely as an aid in continuing tax education for Don Fitch Accountancy blog and email members. Due to the constantly changing nature of the subject of the materials, this product is not appropriate to serve as the sole resource for any federal tax, accounting opinion, tax return position, and must be supplemented for such purposes with other current authoritative materials. The information in this blog post has been carefully compiled from sources believed to be reliable, but its accuracy is not guaranteed. In addition, Don Fitch Accountancy is not engaged in rendering legal or other professional services and will not be held liable for any actions or suits based on this blog post, email, or comments made during the above presentation. If legal advice or other expert assistance is required, seek the services of a competent professional.

Published by Don Fitch, CPA

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