I've been reading about the Passive Activity rules that prevent passive losses (eg Depreciation) from being offset against ordinary income. Unless of course, the taxpayer shows material involvement and claims to be a real estate professional, spending 750 hours per year.
Employing a property manager to manage out of state properties makes it virtually impossible to stay actively involved and spend 750 hours.
I'd like to understand how people are dealing with this. Is there a way to still stay actively involved with property management in place at the property? Or is the only option available to carry the depreciation and losses forward?
Would appreciate any thoughts and insights on this.
Investor · Charleston, SC · Member since 2011 · 606 posts · 413 votes
2y
It is very difficult if you have a W-2 job and for the IRS to consider you as a real estate professional. Nearly impossible. This was the case for me when I was working for a corporation and eventually when I quit and went into real estate full-time, I was able to carry forward that depreciation, and now I am a real estate professional, since I am in it full-time.
Thanks Randy. Yes, with a W2 job, it's next to impossible.
But I'm wondering how someone who doesn't get a W2 income, can be classified as a RE professional if the property is out of sate and is managed by a local property manager? Is that even possible and allowed? Managing a property manager wouldn't take 2 hours a day (for the 750 hour test), assuming that is even counted as material participation.