Rental Losses for Real Estate Professionals

To qualify as a "real estate professional" more than one-half of the personal services you perform must be in a real property trade or business in which you materially participate and in which you perform more than 750 hours of personal services during the taxable year.  "Personal services" generally means "any work performed by an individual in connection with a trade or business" such as direct involvement in the day-to-day management or operations of the activity.  A real property trade or business is "any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business."  "Material participation" is defined as involvement in the operation of the activity that is regular, continuous, and substantial.

Put simply, taxpayers who do spend their time working with investment properties should reconsider their status and determine their eligibility to convert their passive rental losses to fully deductible losses.  If you are engaged in a real estate business, and you own rental properties that operate at a loss, you should consider whether you qualify as a "real estate professional"; and, if so, consider making the election to treat all interests in rental real estate (including such interests held as a limited partner) as a single rental activity (which would allow you to consolidate all your time spent for the purpose of meeting the 750 hours test).  You may find that you could obtain significant tax savings.

-- Bruce Royal