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Real Estate Professional Rules

March 1, 2017

 

Navigating the Real Estate Professional Rules

By Tony Nitti, CPA, MST 

March 1, 2017

 

Under Sec. 469, a taxpayer only may offset losses from a passive activity against income from a passive activity. A passive activity generally includes any trade or business of a taxpayer in which the taxpayer does not materially participate and any rental activities of a taxpayer, regardless of the level of participation. 

 

A rental activity of a taxpayer that qualifies as a real estate professional under Sec. 469(c)(7) is not presumed to be passive and will be treated as nonpassive if the taxpayer materially participates in the activity. 

 

A taxpayer qualifies as a real estate professional if (1) more than one-half of the personal services the taxpayer performs in trades or businesses during the tax year are in real property trades or businesses in which the taxpayer materially participates, and (2) hours spent providing personal services in real property trades or businesses in which the taxpayer materially participates total more than 750 during the tax year.

 

 A real estate professional taxpayer generally must establish material participation in each rental activity separately. However, the taxpayer may elect to aggregate all of his or her interests in rental real estate for purposes of determining material participation.

 

Passive income, including from rental activities, is generally subject to the net investment income tax (provided other criteria are met) unless the taxpayer is a qualifying real estate professional and the income is derived in the ordinary course of a trade or business.

 

A safe harbor in such cases provides that 500 hours in the rental activity either in the tax year or in any five years (whether or not consecutive) of the immediately previous 10 years constitutes services in the ordinary course of a trade or business.

 

 - See more at: http://www.thetaxadviser.com/issues/2017/mar/navigating-real-estate-professional-rules.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=01Mar2017#sthash.vRIUTKn2.dpuf


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