Tax Planning: Real Estate Activity Rules

Tax Planning: Real Estate Activity Rules

View Real Estate Tax Planning Guide

Real Estate Activity Rules

Income and losses from investment real estate or rental property are passive by definition — unless you’re a real estate professional. Why is this important? Passive income may be subject to the NIIT, and passive losses are deductible only against passive income, with the excess being carried forward. To qualify as a real estate professional, you must annually perform:

  • More than 50% of your personal services in real property trades or businesses in which you materially participate, and
  • More than 750 hours of service in these businesses during the year.

Each year stands on its own, and there are other nuances to be aware of. If you’re concerned you’ll fail either test and be subject to the 3.8% NIIT or stuck with passive losses, consider increasing your hours so you’ll meet the test. Keep in mind that special rules for spouses may help you meet the material participation test. Warning: To help withstand IRS scrutiny, be sure to keep adequate records of time spent.

View Real Estate Tax Planning Guide to learn more about:

Home-related deductions

Home office deduction

Home rental rules

Home sales

Real estate activity rules

Depreciation-related breaks

Tax-deferral strategies for investment property

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