Many people these days have second sources of income, and it’s crucial to remind them to keep diligent records. A husband and wife team failed to do just that and found themselves facing off against the IRS in a new Tax Court case.
The tax limits generally deductions for passive activity losses (PALs) from real estate unless you can qualify as a real estate professional. To measure up, you must be able to prove that you spent enough time on your real estate activities. In a new case, Sezonov, TC Memo 2022-40, 4/20/22, the taxpayer came up short, even with the Tax Court giving him the benefit of the doubt.
Background: As a general rule, investors in activities such as real estate in which they don’t materially participate can only take deductions up to the amount of their “passive income” for the year. Thus, they can’t claim any annual losses, although there’s a limited PAL write-off allowed for real estate investors who are “active participants.” Normally, you can use up to $25,000 of loss to offset non-passive income. This $25,000 offset is phased out for a modified adjusted gross income (MAGI) between $100,000 and $150,000 of MAGI.
However, if your real estate activities rise to the level of being a real estate professional, you can deduct a loss against non-passive income, just like any other business. There are two key requirements for qualifying as a real estate professional.
1. More than half of the personal services you perform in all trades or businesses during the tax year are performed in real property trades or businesses in which you materially participate.
More From The Real Estate Guys…
- Sign up for The Real Estate Guys™ New Content Notifcations
- Check out all the great free info in our Special Reports library.
- Don’t miss an episode of The Real Estate Guys™ radio show. Subscribe on iTunes or Android or YouTube!
- Stay connected with The Real Estate Guys™ on Facebook, and our Feedback page.
The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training, and resources to help real estate investors succeed.
Broadcasting since 1997 with over 600 episodes on iTunes!
Love the show? Tell the world! When you promote the show, you help us attract more great guests for your listening pleasure!