One of the most popular topics on our webinar “Real Estate Deductions You Can Still Take” was the real estate professional deduction.
Here are the quick bullet points:
If you make more than $100,000 per year, the only way you’ll get a full deduction for real estate losses against other income is if you’re a Real Estate Professional.
A Real Estate Professional must have:
- Minimum 750 hours per year of real estate activities, AND
- More hours in real estate activities then any other activity.
Unfortunately, that’s where a lot of tax returns stop.
You must also have 500 hours or more active participation per property. Yes, per property!
If you’ve got 10 properties, that means 5,000 hours unless you make an election to aggregate the properties. Then you have just 500 hours required in total.
But there’s a possible problem that occurs when you sell. If you have a loss on your property, the loss from the property is held within the aggregated group. It can’t be currently taken against other income.
Here are some of the follow-up questions we got.
Q: Diane: If a LLC owns multiple properties, what are the tax implications when you sell 1 property?
If you’ve aggregated your group, the loss stays within the group. The fact that the properties are all held within one LLC do not make a difference here. The only way to free up the loss to take against current income would be if there was a material change in circumstance so that the properties were no longer similar. In that case, you can make an election to ‘de-aggregate’ the group.
We talked more about that in “Tax Strategies for Real Estate”, which is part of the program Real Estate Accountant in a Box that we discuss at http://www.RealEstateLoopholes.com
Q: I took the election was audited and won my case. How do I get rid of the election since we are doing short sale on 3 condo and there was one house involved that is not being sold?
In order to ‘de-aggregate’ there must be a material change first. In other words, before you said all the properties were similar. Most likely they were all rental properties and you were renting them out. Something has to change. For example, if the remaining property was changed into a business, not a passive activity, the properties would no longer be part of a similar activity.
Remember you also need to make the proper election on your tax return in order to claim that suspended loss.