Active versus Passive Realestate losses

4 Replies

I bought 5 single family rental homes this year so I have a lot of negative cash flow to report on taxes.  I'd like to declare myself a "real estate professional" as I'm on sabbatical from my W2 job this year and could say I have spent the obligatory hours on real estate work, however, on googling this issue, many people advise against because real estate activity has to be active management and I have professional managers doing the day-to-day.  My accountant just provided information and wants me to decide whether to claim this without recommending me one way or the other.  Anyone have thoughts one way or the other on being a "real estate professional" from standpoint IRS for a W2 employee who has professional management of my properties?  Many thx !

@Richard Snyder

Did you spend (1) 750 or more hours during 2018 in "real property trades or businesses" in which you materially participate AND (2) more than 50% of your personal services preformed during 2018 where in the "real property trades or businesses" in which you materially participate?

You said you're on sabbatical "this year".  Are you referring to 2019 (as it is currently 01/01/2019) or 2018?  If 2018 you may qualify for the "mom & pop" $25k allowance on passive real estate losses as long as your AGI is within threshold.

Being categorized as a real estate professional just allows you to make a grouping election with respect to your rental real estate activities for a material participation determination.

Your tax advisor should be explaining the pros, cons, and impact of all scenarios.

"many people advise against because real estate activity has to be active management and I have professional managers doing the day-to-day"

Many people also believe the earth is flat.  Ignore the noise and work with a competent tax pro.  ; )

Originally posted by @Richard Snyder :

I bought 5 single family rental homes this year so I have a lot of negative cash flow to report on taxes.  I'd like to declare myself a "real estate professional" as I'm on sabbatical from my W2 job this year and could say I have spent the obligatory hours on real estate work, however, on googling this issue, many people advise against because real estate activity has to be active management and I have professional managers doing the day-to-day.  My accountant just provided information and wants me to decide whether to claim this without recommending me one way or the other.  Anyone have thoughts one way or the other on being a "real estate professional" from standpoint IRS for a W2 employee who has professional management of my properties?  Many thx !

Have you logged hours You need to should detail recording of your hours if audited. 

If you meet the requirements of 750 hours, you probably can qualify for the RE professionals. 

However, qualifying as the real estate professional will do you no good, if you have not materially participated (not active )in the rentals activities. 

Each rental is looked at separately to see if you meet the test put out by the IRS. 

If your PM is doing all the work and you have not met the material participation test, you still can not deduct the losses. 

Grouping all the activities as one activity can possibly bump your participation on each rental to the material participation. We don’t know that detail to help you with that. 

Grouping activity should be evaluated and done carefully as you cannot release suspended loss by disposing just one house.

This is complicated part of the code and you should sit down with your professional. 

Can time spent researching/analyzing investment opportunities, traveling to see opportunities and education  be considered as part of the time spent minimums? 

@Richard Snyder

The first thing is to determine whether claiming the real estate professional designation will benefit you.

If your rental tax losses are below $25,000 and you make less than $100,000, you may not benefit as you would be eligible to take the same losses regardless of the designation.

If you do benefit from being a real estate professional, you have to note that there are a lot of rules/record keeping required to actually get the benefit.