Can Real Estate Professionals Deduct Rental Losses?

Generally, rental activities are treated as passive activities. Passive activity losses are generally permitted to be deducted to the extent of passive income. Passive activity losses, to the extent not utilized, are suspended until passive activity income is generated or the activity is disposed. Suspended passive losses are carried forward indefinitely and do not expire. Passive losses generally cannot offset income from wages, active trade or business income and investment related income.

However, if you qualify as a real estate professional, you may be able to deduct rental losses against other sources of income. In order to qualify as a real estate professional, an individual must satisfy two-time related requirements. First, one must spend at least 750 hours per year in real property trades or businesses. This includes construction, development, leasing, brokerage, etc. The individual must also spend at least half of his or her time in a year in real property trades or businesses.

The Internal Revenue Service was recently successful in denying a taxpayer real estate professional status where his tax return also indicated significant wage income from non-real-property trades or businesses. The taxpayer, in Hassanipour, T.C. Memo 2013-88, spent more than 1,900 hours in a year as a researcher and also deducted rental losses as a real estate professional.

The IRS disallowed the rental losses based on the fact that the taxpayer was unable to support, based on the time requirements, that he spent more time on his rental activities than his job as a researcher.

Presumably, the IRS will continue to examine returns where real estate professional status is claimed and significant W-2 income from non-real-property trades or businesses is also present, since the time requirement tests for real estate professionals are difficult to achieve.

Please contact your SD representative if you have any questions regarding the real estate professional requirements.

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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© 2019 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

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