Those of you who own rental real estate, whether a former home or just an investment property, probably already know that losses by rental properties can only be written off against passive investment gains and not against ordinary (active) income (such as that reported on a W-2). Passive income is generally only produced by real estate investments and limited partnerships, so it is incredibly difficult to avoid building up a passive tax loss year after year without any way to relieve it in sight. Unless you are a real estate professional, in which case rental real estate losses are active losses instead of passive. So what is a real estate professional?
According to the Internal Revenue Code, a real estate professional is a taxpayer with "more than one-half of the personal services performed in trades or businesses during the tax year performed in real property trades or businesses in which the taxpayer materially participates", and who performed "more than 750 hours of services during the tax year in real property trades or businesses in which the taxpayer materially participates".
If you don't meet this requirement, don't be tempted to claim real estate professional status on your return. If the IRS reverses your claim you could be subject to substantial misstatement penalties as well as interest on tax and penalties due.
Rental property owners (with more than 10% ownership) can still write off $25,000 of rental real estate losses per year if their income is below $100,000 in a given year. The deduction phases out between $100,000 and $150,000 and is not available above $150,000 in adjusted gross income.
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