(income tax question) Active vs. Passive
My CPA advised that since I will be managing the rental myself, rental income qualifies as Active (=earned) income (vs. Passive).
Does that sound right?
Originally posted by George P.:Originally posted by OracleofMN:
Guys, you have look at the IRS Pub 925. Even though RE is considered a passive activity, if you actively participate you can deduct the loss.Basically the rule is if you actively participate in the business you are allowed a special allowance to deduct up to 25k passive loss against ordinary income, subject to phase-out rules.
It is considered a passive activity (unless real-estate professional) but you are given an allowance if you actively participate in what they consider to be a passive activity. If you don't actively participate (meaning approving new tenants, deciding on rental terms, approving expenditures, and similar decisions) your loss would only be deductible against your passive income.
See page 3-5 of this pub for more clarification.
As with any IRS issue, this is a very clear and understandable issue.
Phil
Phil - that's very helpful
I wasn't aware that only active participation allows sheltering rental income loss against job income.
Great advise
Thanks!!!!
The requirement for RE professional is more restrict than just having active participation. To be a pro, you have to (1) have half of your professional work time devoted to real estate, and (2) your professional work time on real estate has to be over 750 in that year. But any activity realated to real estate, as listed above by George, will qualify you as having active participation.
Hi Ebere,
yeah, I know what you mean.
But when I went through the exercise, I really do work a lot of hours (I'm not trying to boast - I wish I could work a lot less).
Once I started to actually track how many work hours vs real estate hours it became clear that work was going to be the clear winner by a mile - so there's no way I could ever qualify.
Oh well - no worries. I just have to save up the depreciation for when I sell. That should see me sailing into retirement with a bucketload of tax free $$$
Originally posted by Michael Stole:Originally posted by Charles Perkins:
Something else to keep in mind. Passive losses may not be deductible in the current year, but they can still be carried forward into future years when you have passive income or sell the house.When sell the house, that is capital gain (or loss if selling price is lower than your buying price when you bought the house) and passive loss can not be offset against capital gain.
That is my understanding.
In general this true but when a passive activity is sold (rental property). Then Reg. § 1.469-2T(c)(2) applies. Gain on the sale of a passive activity is passive income, if it was a passive activity in the year of disposition.
Originally posted by David Beard:
Ebere -- what is the value of being a RE professional, other than not having to worry about passive loss limits. Are there other deductions you're entitled to, or other perks??
The main value is in being able to deduct passive losses. And for those of us where buy and hold is our primary strategy, it becomes very valuable. Apart from this, most other deductions/perks are available to other classes of real estate investor. I hope this helps
Originally posted by Matt R.:
Hi Ebere,
yeah, I know what you mean.
But when I went through the exercise, I really do work a lot of hours (I'm not trying to boast - I wish I could work a lot less).Once I started to actually track how many work hours vs real estate hours it became clear that work was going to be the clear winner by a mile - so there's no way I could ever qualify.
Oh well - no worries. I just have to save up the depreciation for when I sell. That should see me sailing into retirement with a bucketload of tax free $$$
I agree Matt. See you on the other side of retirement!