Real Estate Professional Passive
Activity Loss Exemption
Real Estate Professionals are
afforded a special exception
regarding the losses they can expense during the year
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Rental Activities for Real Estate
Professionals
Real
estate rental activities are automatically passive for all
taxpayers except qualifying real estate professionals. If you
qualify as a real estate professional, rental real estate activities
in which you materially participate in are not passive activities.
This exception allows those that qualify to report income as
nonpassive income or a loss as a nonpassive loss from rental
real estate activities
Real Estate Professionals are
professionals that participate in
a trade or business that does any
of the following with real property:
- Develops or redevelops it
- Constructs or reconstructs it
- Acquires it
- Converts it
- Rents or leases it
- Operates or manages it
- Brokers it
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Real Estate Professional Qualification
To meet the IRS Real Estate Professional exception your must
meet
the following activity tests
for the tax year:
- You perform more than half of
your business working hours
in the real estate business.
- You perform more than 750
hours of this type of work during
the year.
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For married couples filing jointly,
both the "50% of services test"
and the "750 hours test" must be met by one of the spouses
individually, without regard to the other spouse's services.
A closely held corporation can qualify as a real estate professional
if more than 50% of the gross receipts for its tax year came from
real property trades or businesses in which it materially
participated.
Passive Loss Limits
There are no limits to being able to use rental property losses if
you are a real estate professional. The real estate losses are
deductible against any other form of income. You still need
to
show that you materially participate in your rental real estate
activities to avoid passive activity treatment.
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