Real Estate Professional Rules

In most cases, the IRS considers a rental real estate business to be a passive activity, which would generally cap the deductibility of tax losses generated by such business in any given tax year at the amount of passive income. Any excess loss from rental real estate activities would be suspended and carried forward to the subsequent tax year and would become deductible when such activities are disposed of or applied against passive income generated by the taxpayer.

A notable exception exists under IRC 469(c)(7) for those deemed to be “real estate professionals.” If certain tests are met, a taxpayer can deduct rental real estate losses without regard to passive activity limitations previously described.

Each of the following must be satisfied to qualify as a real estate professional for a given tax year: 

1. Own at least one interest in rental real estate;
2. More than one-half of the services performed during the tax year by the taxpayer are in real property trades or businesses in which the taxpayer materially participates; and
3. More than 750 hours of services are performed during the tax year in real property trades or businesses in which the taxpayer materially participates.

A real property trade or business is defined as an activity engaged in any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage.

Taxpayers should keep accurate, complete, and contemporaneous records that document their involvement in their rental real estate activities. Doing so will ensure that their real estate professional status is appropriately supported should such status ever be challenged by the IRS.

For more information regarding real estate professional tax status, please reach out to your Citrin Cooperman advisor.