Real Estate Tax News

The passive loss rules prevent deducting rental real estate losses with two exceptions.

Exceptions:

1. The Real Estate Professional Exception. Taxpayers who spend more than 50% of their working hours and over 750 hours each year materially participating in real estate as a developer, broker, landlord, etc. are allowed to take their real estate losses.

2. The Active Participation Exception. This exception allows a maximum of $25,000 of losses each year and is limited to taxpayers with lower modified adjusted gross income. Taxpayers with MAGI above $150,000 are excluded from this exception. Taxpayers with MAGI between $100,000 and $150,000 may have their losses limited. While taxpayer’s with MAGI up to $100,000 will be able to deduct up to $25,000 of their real estate losses.

The IRS is scrutinizing returns with large rental losses. Especially those taken by taxpayers claiming to be real estate professionals (Exception 1 above). It is imperative that you keep time logs showing your qualifying real estate professional hours.