Correction and Clarification Regarding Rental Activity Classification
After reviewing IRS rules under IRC §469, I want to correct my earlier statement that “A taxpayer can materially participate in a rental activity and therefore be non-passive without meeting the real-estate-professional thresholds.”
That statement was (and is) incorrect.
Under §469(c)(2), all rental activities are legally passive by definition, regardless of how actively the owner manages the property. The only exceptions are:
- When the taxpayer qualifies as a Real-Estate Professional under §469(c)(7) (more than 750 hours per year and more than half of total working time in real-property trades or businesses); or
- When the activity is not considered a “rental activity” (for example, short-term rentals averaging seven days or less, or rentals providing hotel-like services).
For most long-term landlords, like myself, rental income and losses remain passive. However, “active participation” allows up to a $25,000 deduction against non-passive income if AGI is below $100,000, phased out up to $150,000, with any remaining losses carried forward under Form 8582.
My earlier understanding and guidance was mistaken — material participation alone does not make a long-term rental non-passive under current IRS law.
Thanks for the help in enlightening me on this subject.
