Do you own a real estate property? Have you ever considered whether or not owning rental property qualifies you as a real estate professional? Being classified as a real estate professional by the IRS comes with a slew of benefits and tax breaks. Rental real estate losses are generally considered passive and can only be countered by other passive income streams. This restricts your income tax reduction opportunities. Real estate professionals, on the other hand, can get around this restriction by offsetting losses with any other type of regular income.
Taking full use of the advantages of rental real estate involves navigating complicated tax procedures. Taxpayers must be
aware of the distinctions between passive and ordinary income, as well as difficulties specific to real estate professionals. Real estate professionals now have the option of using regular income to cover real estate losses (such as wages, interest and dividends, self-employment income, or retirement income). To take advantage of this, taxpayers must demonstrate that real estate is their primary source of income. In general, there are three basic criteria used to assess whether or not someone qualifies:
- At least one rental real estate interest must be owned by the taxpayer.
- More than half of the services provided by the taxpayer throughout the year must be related to real estate in which the taxpayer or the taxpayer’s spouse has a major involvement.
- During the year, the taxpayer must provide more than 750 hours of service in property trades or businesses in which he or she has material participation.
It is crucial to note that, unless an election is made to merge real estate interests, each interest in rental real estate is examined separately when using the aforementioned parameters.
If a taxpayer does not qualify as a real estate professional, which is more often than not the case, a rental real estate loss allowance is available under a special passive activity loss limitation exception. Taxpayers with adjusted gross incomes of less than USD 150,000 can deduct up to USD 25,000 in rental real estate losses for property they actively manage. Active management does not necessitate the level of involvement required to be classified as a real estate professional. It does, however, require taxpayers to own at least 10% of the property in question and to file a joint return if they are married.
Anyone who owns rental property should look into the qualifications for real estate professionals. California does not follow the real estate professional rules because they are federal rules. Qualifying for this status and/or arranging in accordance with the USD 25,000 rental real estate loss limit can result in significant tax benefits. However, because the subject is so complex, we urge that you speak with a tax specialist about it. If you have any questions regarding how these rules apply to your particular situation, please contact IDM Professional Corporation CPA for more information.
