Large rental losses claimed by real estate professionals are an IRS red flag. Duh! Real estate pros must meet two tests to pass the passive activity loss rules and deduct their rental losses. They must 1) spend over half of their working time and 2) more than 750 hours a year materially participating in each real estate activity. These two requirements must be met on a property-by-property basis for each unit’s rental losses to be treated as nonpassive. For many real estate professionals meeting the requirement for each property separately is usually unrealistic. Taxpayers with multiple real estate properties and/or those with other jobs outside their rental operations will find it near impossible to meet both requirements. There is only so much work time in a year. Normally around 2,000 hours. So, owning three or more properties makes it difficult to convince the IRS that the tests are met.
However, there is a simple solution. Electing to group multiple rentals as a single activity makes it easier to pass the tests and to take the losses. Attach a statement to the Form 1040 stating that all rentals are treated as a single activity under section 4699(c)(7)(A). The IRS allows this election to be made late by attaching the election to an amended return. Better late than never. We can amend your return to add this election.