Rental as passive vs active income (real estate professional) what are the steps to take to determine which is better?

[Sylvia999]

I am qualified as real estate professional, however I am little hesistent to use it(red flag), so what do I need to do to find out how much benefit to have my rental income as passive or active income (whether to claim RP)?

[tagteam]

The link below is an excellent guide in this respect, but you should be advised that reporting as a real estate professional has no impact on rental losses unless you materially participate as a real estate professional.

See https://www.irs.gov/pub/irs-utl/33-Real%20Estate%20Professionals.pdf

As an aside, the terms would be passive versus nonpassive income/loss. If you materially participate in your rental activities as a real estate professional, net losses would be treated as nonpassive (which means you could deduct those losses from other types of income).

[Cindy4]

Hi @Sylvia999 !

The benefit of being a Real Estate Professional regarding rentals is that you claim the losses against other income and take advantage of the home office deduction.  You may also avoid the Net Investment income tax.

Here is a really good discussion on the topic:

https://www.taxaudit.com/tax-audit-blog/irs-definition-of-real-estate-professional-tax-status

Hope this helps!

Cindy