Summary of IssueI discovered a structural limitation in TurboTax Online (Premium / Live Assisted) regarding the classification of rental real-estate activities under IRS §469.TurboTax Online currently allows non-passive (material participation) treatment only when a taxpayer selects the Real Estate Professional path. However, under IRS Publication 925, material participation and real-estate-professional status are distinct tests:Material participation (§469(h)): Involvement on a regular, continuous, and substantial basis (e.g., personally managing, maintaining, and operating the property).Real-Estate-Professional (§469(c)(7)): 750+ hours and more than half of total working time in real-property trades or businesses.A taxpayer can materially participate in a rental activity and therefore be non-passive without meeting the real-estate-professional thresholds.TurboTax Online merges these two separate IRS standards into a single workflow, meaning:Users who materially participate but are not real-estate professionals are automatically classified as passive,Form 8582 (Passive Activity Loss Limitations) is generated unnecessarily, andLegitimate current-year losses are partially or fully disallowed and carried forward, contrary to IRS rules.This design inflates taxable income and misrepresents compliance for taxpayers who self-manage their rentals (e.g., single-property landlords who do all maintenance, leasing, and management work).QuestionCan TurboTax confirm whether the Online product will be updated to allow non-passive (material-participation) treatment for rental activities without requiring the taxpayer to select “Real Estate Professional” status?If not, can TurboTax provide an official recommendation for users who materially participate but are not real-estate professionals — specifically, whether they must use TurboTax Desktop Home & Business to ensure correct classification and eliminate Form 8582?ClosingI would appreciate clarification or documentation confirming how TurboTax intends to handle this distinction so that materially participating landlords can file accurately under §469(h) without being forced into the §469(c)(7) real-estate-professional election.

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MCSmith1974

Level 2

Solved

TurboTax Online Incorrectly Restricts Non-Passive Classification for Material Participants

Forum|Forum|10 months ago
November 7, 2025
12 replies
1359 views

Summary of Issue

I discovered a structural limitation in TurboTax Online (Premium / Live Assisted) regarding the classification of rental real-estate activities under IRS §469.

TurboTax Online currently allows non-passive (material participation) treatment only when a taxpayer selects the Real Estate Professional path. However, under IRS Publication 925, material participation and real-estate-professional status are distinct tests:

Material participation (§469(h)): Involvement on a regular, continuous, and substantial basis (e.g., personally managing, maintaining, and operating the property).
Real-Estate-Professional (§469(c)(7)): 750+ hours and more than half of total working time in real-property trades or businesses.

A taxpayer can materially participate in a rental activity and therefore be non-passive without meeting the real-estate-professional thresholds.
TurboTax Online merges these two separate IRS standards into a single workflow, meaning:

Users who materially participate but are not real-estate professionals are automatically classified as passive,
Form 8582 (Passive Activity Loss Limitations) is generated unnecessarily, and
Legitimate current-year losses are partially or fully disallowed and carried forward, contrary to IRS rules.

This design inflates taxable income and misrepresents compliance for taxpayers who self-manage their rentals (e.g., single-property landlords who do all maintenance, leasing, and management work).

Question

Can TurboTax confirm whether the Online product will be updated to allow non-passive (material-participation) treatment for rental activities without requiring the taxpayer to select “Real Estate Professional” status?

If not, can TurboTax provide an official recommendation for users who materially participate but are not real-estate professionals — specifically, whether they must use TurboTax Desktop Home & Business to ensure correct classification and eliminate Form 8582?

Closing

I would appreciate clarification or documentation confirming how TurboTax intends to handle this distinction so that materially participating landlords can file accurately under §469(h) without being forced into the §469(c)(7) real-estate-professional election.

TurboTax Premier Online

Best answer by AmeliesUncle

@MCSmith1974 wrote:

A taxpayer can materially participate in a rental activity and therefore be non-passive without meeting the real-estate-professional thresholds.

Why do you say that? Do you have special circumstances, such as short-term rental that would make it NOT a "rental activity" or have enough personal use of the property that may make it not a rental activity? Or are you doing certain grouping elections with your business?

Material Participation in a "rental activity" does NOT make it non-passive.

Or am I misunderstanding your situation or what you are asking about?

Publication 925 [see also §469(c)(2)], under "Passive Activities" says:

There are two kinds of passive activities.

Trade or business activities in which you don’t materially participate during the year.
Rental activities, even if you do materially participate in them, unless you’re a real estate professional.

https://www.irs.gov/publications/p925#en_US_2024_publink1000104565

M-MTax

Level 15

I'm going to page @AmeliesUncle for this one, but I believe this has been an ongoing issue over the past few years.

You can make the adjustment with the desktop products in Forms Mode but I suspect you may be SOL with the online versions.

MCSmith1974Author

Level 2

Yeah, thanks.

I don't mean to keep posting about it, but it's a major issue (at least for me).

Until yesterday, I didn't even realize my last 8 years of Turbo Tax Online were done incorrectly.

M-MTax

Level 15

That is indeed unfortunate. I believe the best solution would be to switch to a desktop version, if you can manage to do that with your hardware configuration.

AmeliesUncleAnswer

Level 15

@MCSmith1974 wrote:

A taxpayer can materially participate in a rental activity and therefore be non-passive without meeting the real-estate-professional thresholds.

Material Participation in a "rental activity" does NOT make it non-passive.

Or am I misunderstanding your situation or what you are asking about?

Publication 925 [see also §469(c)(2)], under "Passive Activities" says:

There are two kinds of passive activities.

Trade or business activities in which you don’t materially participate during the year.
Rental activities, even if you do materially participate in them, unless you’re a real estate professional.

https://www.irs.gov/publications/p925#en_US_2024_publink1000104565

M-MTax

Level 15

@AmeliesUncle wrote:
....Do you have special circumstances, such as short-term rental that would make it NOT a "rental activity"....

I made the assumption that was the case in my first response.

AmeliesUncle

Level 15

Yeah, I figured that you assumed it was a short-term rental (in which case your comments are accurate), but after re-reading the OP's post, I realized she didn't say anything about that, which is why I asked for more details about why she thinks it should be non-passive.