Is Your Real Estate a Business or a Passive Investment?

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If your real estate is a passive investment, you’re likely to have trouble taking real estate paper losses against other income. Want more information about real estate passive losses? Send us a question by posting at

Today, though, we’re talking about turning your real estate holdings into a business, instead of a passive investment. There are a couple of tax benefits to doing so. The main one is that losses will probably be deductible against your other income, regardless of the amount of the other income

If you provide substantial services that are primarily for your tenant’s convenience, such as regular cleaning, changing linen or maid service, you have a business, not a passive investment. The IRS says that substantial services do not include furnishing utilities, cleaning, or trash collection. The line of delineation seems to be centered around maid or janitorial services.

Typical real estate businesses are hotels, motels, boarding houses, bed & breakfasts and short-stay vacation rentals. The IRS also considers trailer park rents as business, and thus subject to self- employment tax.

There is a downside too, though. If you have a real estate business, you’ll pay self-employment tax of 15.3% on the income, unless you have it in a corporate structure.

Is it right for you? It depends. Like with all tax strategies, talk to someone experienced in these matters who is aware of your own unique circumstances.

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