Should rental losses be non-passive for both spouses when filing jointly?

Question

Hi all, looking for some clarification on real estate losses. My parents file married filing jointly. My Dad has a standard W-2 job, and my Mom works full-time in the long-term rental real estate business. All of their rentals are owned through a single LLC that they each own 50/50.

My Mom qualifies as a Real Estate Professional and also materially participates in all of our rental activities.

However, our CPA is telling us that only her 50% of the rental activity can be treated as non-passive losses, and my Dad's 50% must remain passive losses, even though they are filing jointly and the rentals part of the same LLC activity.

My understanding was that if one spouse qualifies as a real estate professional and materially participates, then the rental activity becomes non-passive for the joint return as a whole, not split based on ownership percentages.

Has anyone dealt with this before? I've pointed out IRC 469(c)(7)(B) and Publication 925, but our CPA is saying that we are interpreting this incorrectly.

Aaron Zimmerman · Answer

If one spouse qualifies for reps and materially participates in the rental activity, then all the rental activity should be eligible to write off any losses against active income

to better help, can you describe how your mom is a real estate professional? What does she do exactly?

Ashish Acharya · Answer

@Ayush Goyal,

You're right in your understanding! When filing jointly, if one spouse qualifies as a Real Estate Professional and materially participates, the rental activity as a whole can be treated as non-passive for the joint return. This applies regardless of each spouse's ownership share in the LLC. IRC 469(c)(7)(B) and Publication 925 back this up, stating that the active participation of just one spouse can turn the entire rental activity non-passive.

It sounds like your CPA may have misunderstood this rule. You may want to revisit the conversation or get a second opinion to make sure you're optimizing your tax strategy properly.

I’ve also sent you some resources and guides that might be helpful, feel free to check them out.

John Morgan · Answer

Their CPA is wrong. Get a new one.

Ayush Goyal · Answer

Thanks Aaron. My Mom owns and manages long-term rental multifamily properties in a syndication. She works on this full-time, and has been claimed as a REP and material participation.

Specifically, our CPA is saying that even though my Mom meets the Real Estate Professional classification, this does not automatically apply to my Dad.

Should rental losses be non-passive for both spouses when filing jointly?

Should rental losses be non-passive for both spouses when filing jointly?

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