Ordinarily, rental activities are automatically considered passive activities and their losses may only be used to offset passive activity income. Thus, most rental activities involving real estate are treated as passive activities. However, there is an exception to this unfavorable passive activity loss rule for real estate professionals.
Rental real estate activities will not be treated as passive activities for a taxpayer who is considered a real estate professional. This means that losses from such activities will not be limited to offset passive activity income only, but they can offset other income as well.
A taxpayer is considered a real estate profession if he/she satisfies the following requirements:
- More than one-half of the personal services performed in trades or businesses by the taxpayer during a taxable year are performed in real property trades or businesses in which the taxpayer materially participates; and
- Such taxpayer performs more than 750 hours of services during the taxable year in real property trades or businesses in which the taxpayer materially participates.
The following activities are considered "real property trade or business":
– Real property development & redevelopment;
– Real property construction & reconstruction;
– Real property acquisition;
– Real property conversion;
– Real property rental & leasing;
– Real property operation & management; and
– Real property brokerage trade or business.
Maybe. The personal services performed by an employee do no qualify as services performed in real property trades or businesses unless the employee has a 5% or greater ownership interest in his/her employer (e.g. the employee owns part of the real estate company).
Tax laws are complex and ever-changing. Although there are various tax preparation software on the market that may help you with your tax problems, they cannot provide the same level of service that an experienced and knowledgeable real estate lawyer can. If you are unsure about the characterization of your expenses or you need someone to represent you before the IRS, a tax attorney can help you.