Rental Real Estate — Passive or Active

According to this Turbo Tax article, rental properties are, by definition, passive activities and are subject to the passive activity loss rules.However, there is an exception: If you own at least 10% of the property, and you make major management decisions, you are ‘actively participating’ in a rental real estate activity. This allows you can deduct up to $25,000 of your rental loss even though it’s passive. However, this exception phases out as your income rises once ‘you have modified Adjusted Gross Income over $100,000’. Then the $25,000 rental real estate exception decreases by $0.50 for every dollar over $100,000.

To calculate your deductible loss, you may need to complete Form 8582: Passive Activity Loss Limitations according to the IRS instructions. Turbo Tax online may help you make that decision.

If you spend considerable time in real estate activities during the year, you may be eligible for a favorable special rule. For so-called real estate professionals (as defined by IRS guidelines), the passive activity rules don’t apply to losses from certain rental real estate activities, which means the losses can usually be fully deducted in the year they occur. For more information on this beneficial special rule, consult IRS Publication 527: Residential Rental Property (Including Rental of Vacation Homes).

For more on passive activities, see Tax Topic 425: Passive Activities-Losses and Credits.