Deducting your rental property tax losses against your other income is tricky and heavily regulated, as you likely know. Below are some major hurdles to pass:
Attain a Real Estate Professional Status by passing the below two tests annually:
- Spend more than 50 percent of your work time in real property trades or businesses.
- Perform at least 750 hours of your work in real property trades or businesses.
And material participate in rental activities. A few factors that determine material participation are:
- You spend 500 or more hours working with your rental real estate.
- You do the vast majority or all the work when it comes to your rentals.
- You work over 100 hours at the rental property during the given tax year and no one else works any more than this.
- The rentals are classified as a significant participation activity (SPA) and the SPA exceeds 500 hours for the year.
- You materially participated in the rentals in any 5 out of the 10 previous years.
- The rentals are a personal service activity, and you materially participated in any three prior years.
- If you work 100 hours with the rentals, no one works any more than that, no one else is compensated for managing the real estate property, and you work consistently and significantly on the property throughout the year.
Meeting both the real estate professional test and the material participation standard allows current-year rental losses to offset non-passive income, such as wages or business income.
Additional Considerations:
- Grouping Activities: The IRS allows taxpayers to group multiple rental activities as a single activity under certain circumstances. This can be beneficial for meeting the material participation tests.
- Record Keeping: Meticulous record-keeping is crucial to substantiate your hours and activities related to your rental properties.
Tax laws are complex, and the rules around rental losses are particularly nuanced. It’s strongly recommended that you consult with us for personalized advice regarding your specific situation. We can help you determine if you qualify as a real estate professional, if you meet the material participation tests, and how to optimize your tax strategy for your rental properties.
Please reach out to your Brown CPA Group professional team with any questions at (847)509-4100.