Specifically, the law permits the net losses from rental real estate activities in which an eligible taxpayer materially participates to offset any other income. The provision applies to all individuals and closely held C corporations. Real property trade or business activities are any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business. The taxpayer must perform more than 750 hours of services in real property trades or businesses in which the taxpayer materially participates. The taxpayer must materially participate in the rental real estate activity generating the loss that the taxpayer wants to deduct.
Taxpayers can elect to treat all of their interests in rental real estate as one activity.
Consider a like-kind exchange before selling property. Your tax liability from the sale of real property can be deferred if you exchange the property for similar property. Consider the long-term effect of making the election to aggregate for passive activities. Regulations have dealt with the election by real estate professionals to aggregate their rental real estate interests to meet the material participation standard and treat the activities as nonpassive, keeping the interests from being subject to the passive limitation on allowed losses. If the election is made in this situation, since the rental real estate income is considered nonpassive due to the election, this rental income cannot be used to offset the passive losses generated from the other activities.