The specific techniques and information discussed may not apply to you. Before acting on any matter contained herein, you should consult with your personal legal adviser. The Revenue Reconciliation Act of 1993 has a major impact on some real estate professionals who own rental or investment real estate. Since 1986, the Passive Loss Rules limited the deductibility of losses from rental real estate. All real estate rental was classified as a passive activity.
Passive losses are subject to stringent rules regarding deductibility.
Disallowed losses are carried forward to future years, until either the activity is terminated or passive gains are generated from that or another passive activity. Real estate fields are broadly defined to include brokerage, leasing, management, rental, construction, and development. Fortunately, most real estate agents are Independent Contractors, and therefore qualify, but Congress specifically exempted from this Passive Loss exemption any real estate professional classified as an employee, unless he also owns the company for which he works. Losses from prior years which have been suspended and carried forward are not usable in 1994, but must be carried forward until the property has been disposed. The fact that his wife is also a part-time real estate professional for 700 hours per year does NOT help qualify for this exemption.