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Real Estate Professional Tax Tips

December 18, 2010

Many clients that are real estate agents, rental property owners, or even real estate professionals have questioned the tax rules re active and passive participation in their rental ownership activities. The IRS allows up to a $25k loss on rental properties (many factors involved, AGI, participation rules); when you are a real estate professional you don’t have these limitations. A recent case brought light to the passive/active tax rules. 

Alma Perez was a self-employed real estate loan agent and broker who also owned three residential rental properties. In 2005, she deducted losses from the rental properties totaling $45,199 because she was a qualified real estate professional. The IRS agreed that she qualified as a real estate professional, but disallowed the losses because she failed to materially participate in the rental activities.  She argued that because she was a real estate professional none of her real estate activities, including the rental activities, are subject to the passive loss rules and the case-law (or lack thereof) supports that position. The Court rejected this claim, saying she was ignoring the plain language which says real estate professionals are still subject to the material participation standard.  

We must conclude  not be too quick to assume that an individual who qualifies as a real estate professional can avoid the passive activity rules for their rental properties. The taxpayer must materially participate in the rental activities and the rentals cannot be grouped with the individual’s other real estate activities when making the determination. At GAI ( we are able help you define these determinations and help you with your bookkeeping needs re your rental activities. Part of actively participating is providing clear records on what you have done. Give us a call at 212-979-6830 or stop by for a visit as we can help!

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