A couple of snippets:
- From an IRS CCA (Chief Counsel Advice) - Section 469(c)(2) provides that except as provided in section 469(c)(7), the term “passive activity” includes any rental activity. Section 469(c)(7)(A)(i) provides that section 469(c)(2) shall not apply to any rental real estate activity of a taxpayer for a taxable year if the taxpayer meets the qualification test in section 469(c)(7)(B). Section 469(c)(7)(B) provides the following requirements: (i) more than one-half of the personal services performed in trades or businesses by the taxpayer during such taxable year are performed in real property trades or businesses in which the taxpayer materially participates, and (ii) such taxpayer performs more than 750 hours of services during the taxable year in real property trades or businesses in which the taxpayer materially participates. An individual taxpayer who owns an interest in rental real estate and also meets these requirements is commonly referred to as a “real estate professional,” although the term used in Treas. Reg. §§ 1.469-9(b)(6) and (c)(1) is “qualifying taxpayer.”
- And commentary from a noted tax professional -
Under the general rule of Section 469, all rental activities are treated as passive, regardless of the individual owner’s extent of participation. As a result, rental losses can only be used to offset other sources of passive income. If the owner doesn’t have any passive income—or enough to fully offset the losses--the excess losses cannot be used currently, and instead are carried forward to future years.
An exception is carved out, however, for so-called “real estate professionals,” the idea being that someone who truly earns their living in real estate trades or businesses should be free to use rental losses without limitation.
*A reminder that posts in a forum such as this do not constitute tax advice.
Also keep in mind the date of replies, as tax law changes.
