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.
Planning Point for Taxpayers Facing Passive Activity Gains from Tax Shelters One common situation involving real estate is the sale of the property and the recognition of capital gains, which may or may not be accompanied by the receipt of cash. In effect, one gain allows two losses. If you do nothing, your capital gain will be sheltered by the passive loss carryforward, and the transaction will have no net effect on your taxable income. You can dispose of the appropriate stock and realize the capital loss, which will offset the real estate capital gain, and then use the passive loss carryforward to shelter other ordinary income. When planning for passive income, you cannot assume that all income from a disposition of real estate is capital gain income.