Some rentals are active while others become passive

[pm892]

I have been managing a few rental properties myself and put down as active participation / activities. I have been filing for active profit/loss on all properties for a few years without any problem.

However, for 2021, I noticed that some rental properties are active, while a few others become passive and therefore their loss are not allowed. But I didn't do anything specifically for it, like choosing active/passive status is still done once at the beginning for all properties.

What's going on? How can I fix it?

Thanks very much!

[Anonymous_ · Accepted solution]

"Active" in terms of residential real estate, and in this instance, refers to "active participation" (as opposed to "active income/profit/loss").

See https://www.irs.gov/publications/p527#en_US_2020_publink1000219124

Income from rental real estate is generally passive income and any losses are generally passive losses (and passive losses can typically only be used to offset passive income - with the exception of a special allowance (see the link above)). 

What you are most likely seeing is your passive losses being disallowed as a result of the passive activity loss limitation. Your passive losses will, however, be carried forward to the subsequent tax year.

[pm892]

I guess I didn't put it accurately last time. When I said 'active' last time, I meant 'professional'  I just re-visited TurboTax: in the page of 'Please confirm your professional status', I checked both '>700 hours' and '>50%'. So I guess I am treated as 'real estate professional'. The next page says 'Let's determine your real estate professional deductions'.

In this case, my income from all rental properties should be active, not passive. Therefore it should not subject to any passive loss limitation, right?

If no passive loss limitation, why income from some rentals is treated as passive while income from the others is treated as active?

Thanks.

[Anonymous_]

See https://www.irs.gov/publications/p527#en_US_2020_publink1000234059

You need to materially participate as a real estate professional in your rental activities to avoid those activities being classified as "passive".

Note that you can aggregate (group) your rentals to meet the standard if one or more does not qualify alone.

[pm8921]

Hi,

First of all, I followed your suggestion to group all my properties into a single enterprise, and put it as 'material participation'. However, it didn't help. Some are in active while others are still passive.

Then, I looked into Schedule E Worksheets (go to Forms directly) and confirmed those passive ones do not have 'material participation' box checked. In the step-by-step process, there is no way to check this box for individual properties. As such, I can't correct it in the step-by-step process.

Can I correct the Schedule E form directly for each property?

Thanks very much!

[Anonymous_]

I apologize; I neglected to mention that TurboTax does not support the election for real estate professionals to aggregate their activities under Section 469(c) (7).

See https://digitalasset.intuit.com/DOCUMENT/A51oKyg2O/032522-2021-unsupported-calcs-L1FQfTTgn.pdf

[Anonymous_]

The information on the web site at the link below may be of some utility.

https://www.journalofaccountancy.com/issues/2014/aug/rental-taxes-20149906.html

[pm8921]

Thanks for your quick replies. These two links are very helpful.

Just a quick followup: You said that TurboTax 2021 doesn't support 'aggregating multiple rentals for real estate professionals'. Yet, in TurboTax, there is an aggregation of multiple rents to form an enterprise for QBI safe harbor. Is that something different than what you said?

Does it mean that in TurboTax now, there is no way to aggregate multiple rentals for the purpose of Sec. 469(c)(7)(A) ?

Thanks very much!