Startups

Quick Links

Hot Topics

Paychex Payroll Services: Sign up Today!

Need Some Deductions for 2011?

Don't overlook these!

10 Oddball Tax Deductions

11 Most Overlooked Tax Deductions

Updated for 2011

Passive Activity Rules

<< Previous

Rental Real Estate

A trade or business activity is considered a passive activity if the taxpayer does not materially participate in the activity.

However, rental real estate activities are considered passive even if the taxpayer does materially participate in the activity (except for real estate professionals).

However, there is an exception for real estate nonprofessionals. See the special allowance, next.

Special $25,000 Allowance for Real Estate Nonprofessionals

If you're not a real estate professional there's a special rule that let's you classify up to $25,000 of rental losses as nonpassive.

This means you may deduct up to $25,000 of rental losses against your other, nonpassive income (wages, interest, dividends, etc.).

Qualifying for the special allowance:

To qualify for the special allowance you must (a) actively participate in the activity and (b) your interest (including your spouse's) must be at least 10% (by value) of all interests in the activity throughout the year.

Active participation:

Active participation is not the same as material participation. Active participation is a less stringent standard.

You (or your spouse, if married) may be treated as actively participating if you make management decisions in a significant and bona fide sense.

For example:

Caution!

Merely signing off on what a management agent does won't cut it. Merely reviewing financial statements or conducting analysis that is unrelated to the day-to-day management or operation of the activity is not treated as participation.

Phase out of deduction:

The deduction is phased out if your modified adjusted gross income (MAGI) is between $100,000 and $150,000.

Records to keep:

These may include:

Records should show:

You do not have to keep contemporaneous daily time reports, logs, or similar documents if you can establish your participation in some other way.

Using a management agent: Having an agent manage the property will not prevent you from meeting the active participation test.

EXAMPLE:

Deducting the special $25,000 allowance.

You may use $15,000 of your rental loss to offset your $15,000 of passive income from the partnership.

You may use the remaining $11,000 of your rental loss to offset $11,000 of your nonpassive income (wages).

Next:

Passive Activity Rules: Portfolio Income; Portfolio Income and Passive Losses; Interest on Accounts Receivable

Next >>