Retroactive Cost Seg Study - RE Professional Status Difference

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Individual invests in multiple real estate properties for 5 years while running their business. In 2019 they buy more properties after they sell their business. They do NOT qualify for RE Pro status.

In 2020 they qualify as a RE Pro. 

They can complete a retroactive cost seg study and get a 481a tax deduction in 2020. However, does the fact that they were NOT a RE Pro in 2019 impact the ability to use the deduction to offset non-passive income in 2020?

Originally posted by @Nate Byers :

Individual invests in multiple real estate properties for 5 years while running their business. In 2019 they buy more properties after they sell their business. They do NOT qualify for RE Pro status.

In 2020 they qualify as a RE Pro. 

They can complete a retroactive cost seg study and get a 481a tax deduction in 2020. However, does the fact that they were NOT a RE Pro in 2019 impact the ability to use the deduction to offset non-passive income in 2020?



You will file Form 3115, “Application for Change in Accounting Method,” with the IRS and claim a one-time “catch-up” deduction for the current year’s return. There’s no need to amend previous years’ returns. As you are RE pro, you get to deduct the losses generated via the cost seg. 

If you were amending, the losses generated via higher depreciation would be something called "previously suspended losses" for the current year's real estate professional status and couldn't be deducted in the current year.