Real Estate Professionals and Rental Activity

Real Estate Professionals have special rules for reporting and deducting rental income and losses on their personal tax returns (form 1040).  If you are a real estate professional then rental activities that you materially participate in during the year are not passive activities.  This means that any losses are not limited by the passive activities rules.

Qualifications to be a Real Estate Professional:

  1. More than half of the personal services you performed in all trades or businesses during the year were performed in real propertry businesses in which you materially participated.
  2. You performed more than 750 hours of services during the year in real estate businesses in which you materially participated.

If you qualify to be considered a Real Estate Professional for tax purposes then you have the option of choosing to treat all of your real estate interests as one activity.  Once you make this choice, it is binding for the year you make it and any later years that you qualify as a real estate professional.

The main benefit of delaring yourself a real estate professional on your tax return is so that your rental losses are not limited.  This way if you have rental losses of $40,000, you can take the entire loss and not be limited to the $25,000 passive activity loss rules.

Before preparing your tax return as if you are a Real Estate Professional, it is always wise to consult your tax accountant to make sure your tax return will be correctly prepared.


About the author

Seattle CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. Since 2002, he has owned his own small business, Huddleston Tax CPAs. He is a graduate of Washington State University and the University of Washington School of Law.