Real Estate Professional Tax Overview
There are a number of special tax rules that apply to real estate professionals. These profession-specific regulations are outlined below. It is wise for Realtors and other real estate professionals to secure the services of tax experts who specialize in the real estate niche.
For any tax year in which the taxpayer is a “qualifying taxpayer” (a real estate professional), the rule treating all rental activities as passive activities doesn't apply to any rental real estate activity of the taxpayer. (Code Sec. 469(c)(7)(A)(i)) Instead, that activity is a passive activity unless the taxpayer materially participates. (Reg § 1.4699(e)(1))
Thus, real-estate professionals who materially participate in a rental real-estate activity may use losses or credits from the activity to offset other, non-passive income.
“ Usually, Material Participation Test Doesn’t Apply for Rental ActivitiesIn general, rental activities are passive activities regardless of whether the taxpayer materially participates in the activity. (IRC § 469(c)(2) and § 469(c)(4)) So, unless the “rental” really isn’t a rental under the exceptions provided in Reg. Sec. 1.469-1T(e)(3), or this special rule for real estate professionals applies, the material participation tests can’t be applied to the normal rental. For example, a tax payer who owned an apartment house (but who doesn’t qualify as a real estate professional) and who worked over 500 hours annually on the property would not be considered to have materially participated in the activity, and it would still be a passive activity (albeit eligible for the active participation loss allowance of up to $25,000 per year). Thus, qualifying as a real estate professional is the only way one would be able to deduct in full what would otherwise be a passive activity loss against non-passive income, and then only if material participation in the rental real estate activity can be proven. ”
-