I absolutely love getting the chance to interact directly with my TaxLoopholes clients (and some Diane’s Mastermind clients and my tax firm, Diane Kennedy’s Tax Services clients) when there are new tax issues happening.
And that’s exactly what happened this past weekend. We spent a lot of time going over the Real Estate Professional audits and the distinctions that the IRS is making. There is a lot of confusion among tax professionals as well on this one.
There are TWO requirements to taking the real estate passive loss deduction against other income if your income is over $150K:
(1) You have to be a real estate professional (and this is the one most people concentrate on)
(2) You must materially participate in the property.
(2) is where most people get into trouble. These are two separate and distinct standards. In reality, hours that you spend in one can often translate to the other. For example, if you are materially participating in the property by screening tenants, showing the property and leasing it you also have hours that count toward your real estate professional status.
But just because you’re a real estate professional, it doesn’t mean you get the deduction if you don’t have material participation.
I cover that in more in detail in The IRS Survival Guide to Real Estate Professionals with Real Estate Investments