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Level 1
posted Mar 9, 2021 8:12:46 PM

Got a K-1 showing rental loss. I did not materially participate in that business. Can I say that I did, if I am a Real Estate Professional?

 

Every year I designate myself as a "real estate professional" (I meet all the criteria) for tax purposes.

 

I received a K-1 from a multifamily syndication that I am a limited partner.  It shows a large loss on line 2 (net rental real estate income or loss) because of the huge depreciation amounts done legally with a cost segregation study.

 

I do not materially participate in this business, so I answer "No" when TurboTax asks me if I did.

As a result, I cannot offset my rental income from my other properties with this loss. So the loss accumulates on form 8582, to be used in future years.

 

My question is: Can I answer "Yes" to that question?

My thought process is: since I am a RE Professional, it doesn't matter if I actively participated or not.

Answering "Yes" results in substantial tax savings 🙂

 

 

 

 

 

0 4 1879
4 Replies
Expert Alumni
Mar 9, 2021 9:23:35 PM

You cannot simply answer "yes" because you are a real estate professional.  It's more complicated than that.  You may be able to answer yes.  See the following information from "The Tax Advisor":

 

  • A rental activity of a taxpayer that qualifies as a real estate professional under Sec. 469(c)(7) is not presumed to be passive and will be treated as nonpassive if the taxpayer materially participates in the activity.
  • A taxpayer qualifies as a real estate professional if (1) more than one-half of the personal services the taxpayer performs in trades or businesses during the tax year are in real property trades or businesses in which the taxpayer materially participates, and (2) hours spent providing personal services in real property trades or businesses in which the taxpayer materially participates total more than 750 during the tax year.
  • A real estate professional taxpayer generally must establish material participation in each rental activity separately. However, the taxpayer may elect to aggregate all of his or her interests in rental real estate for purposes of determining material participation.

To see the entire article, click on "Navigating the Real Estate Professional Rules"

Level 1
Mar 10, 2021 9:43:31 AM

David, thanks for the information.

 

I meet the Real Estate Professional guidelines, there is no doubt about that.

 

The referenced article is super complex and confusing.

 

Will a CPA be able to understand it and be able to tell me for sure if I can "elect to aggregate all of my interests in rental real estate for purposes of determining material participation"?

 

 

 

 

Level 15
Mar 10, 2021 10:12:13 AM

Understand that depending on how you do it, when you aggregate your real estate activities, your suspended losses are not released until you have sold or otherwise disposed of all of those activities included in that aggregate. So be wary and careful. Make absolutely certain you are getting the results you desire.

 

Level 15
Mar 10, 2021 10:35:38 AM

@ghettodawg wrote:

Answering "Yes" results in substantial tax savings 🙂

Yes, it would result in substantial tax savings but would also expose you to unlimited liability.

 

Limited partners who materially participate are treated similarly to general partners; you could become liable for the debts and actions of the partnership and other partners. 

 

Regardless, meeting one of the material participation criteria would be next to impossible as a limited partner in an MLP.