Passive Activities and the Real Estate Professional - IRC 469(c)(7) and Reg. 1.469-9 - John R. Dundon II, Enrolled Agent
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Passive Activities and the Real Estate Professional – IRC 469(c)(7) and Reg. 1.469-9

Passive Activities and the Real Estate Professional – IRC 469(c)(7) and Reg. 1.469-9

A qualifying real estate professional may deduct rental real estate losses for each rental in which he/she materially participates provided 3 tests are passed:

  1. More than one half of the taxpayer’s personal services must be in real property business.  ‘Real property’ trade or business activity includes: development, construction, acquisition, conversion, rental, management, leasing, and brokerage.  Examples, a real estate agent is considered to be in the real property trade or business but a construction sub-contractor is not.

  2. Taxpayer must work more than 750 hours annually in the ‘real property business.  A rental activity is considered to be in the ‘real property business’ but the taxpayer must materially participate in the activity for time to be counted.

  3. Taxpayer must materially participate in each separate rental real estate activity unless a written election was filed with an original return to treat all real estate rentals as one single activity.  Once this election is filed it binds all future years.  Be sure to keep a copy of the election in your permanant tax file.

Notes:

  1. One spouse alone must satisfy both tests one and two above.  Spouses cannot divide the tests amongst themselves.

  2. Even if the taxpayer is a real estate professional rental losses are passive and are reported on Form 8582 unless taxpayer materially participated in the rental activity