You may consider yourself a real estate professional. However, the IRS may see you differently when you file. They do not base the title on your job or your license; they base it on your performance. If you are worried you may have deducted too many passive losses this year, contact one of our CPAs to discuss if your standing as a real estate professional is at risk when it comes to the IRS and what we can do about it.

What are Passive Losses?

Losses from real estate rental property are passive by definition, unless you are a real estate professional. If you are a real estate professional then your real estate rental income is not subject to the 3.8% net investment income tax (NIIT) that can apply to passive income. Keeping the official status of “real estate professional” under the IRS rules can save you money on your taxes each year. Passive losses are deductible only against passive income, with the excess being carried forward.

Performance is Key to Qualify as a Real Estate Professional

 

  • You must spend over 50% of your personal service time in real property trades or businesses in which you actively participate.
  • You must spend over 750 hours of service in these businesses during the year. 
  • You should keep a detailed time log of your hours and the work done on each real estate rental property. 

 

You should note that you cannot count service you performed as an employee in real property trades or businesses unless you owned more than 5% of the employer.

Keep in mind that each year stands on its own. If you have any questions or concerns come discuss them with our qualified tax consultants early in the year.