Source: https://www.corporatedirect.com/real-estate/real-estate-professionals-and-rental-losses/
Timestamp: 2019-04-21 01:05:49+00:00

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Are you a real estate professional? Do you work over 750 hours a year on real estate activities and are these annual hours over half the time you work in total?
If so, you can offset real estate losses against your ordinary, taxable income. If one spouse is a doctor and the other is a real estate professional, any passive real estate losses can be used to offset the doctor’s ordinary income.
It is a great tax saving strategy.
Which is why the IRS is careful in its scrutiny of such offsets. A recent case further defines the requirements for doing it right. While the discussion below is somewhat technical, you may want to understand the important points.
You have documented logs of rental activities and other substantiating evidence.
If all of the above are true, then you can deduct the losses against your ordinary, taxable income.
For details of the case and the court findings (which may be somewhat technical) read on.
In Gragg, married taxpayers, Delores and Charles Gragg (the “Graggs”), sought to deduct from their taxable income rental losses they incurred from rental properties they owned. Delores was a licensed real estate agent who worked for a real estate brokerage. The issue on appeal was whether 26 U.S.C. §469(c)(7) automatically rendered a real estate professional’s rental losses nonpassive and deductible, or whether it merely removed 26 U.S.C. §469(c)(2)’s per se bar on treating rental losses as passive. The Ninth Circuit concluded that 26 U.S.C. §469(c)(7) did not automatically render a real estate professional’s rental losses nonpassive and deductible, and that 26 U.S.C. §469(c)(7) merely removed 26 U.S.C. §469(c)(2)’s per se bar on treating rental losses as passive. 2016 WL 4136982, at *2.
The Ninth Circuit found support for its decision in Treasury Regulation 1.469-9(e)(1) and the prior Tax Court decision in Perez v. C.I.R., 100 T.C.M. (CCH) 351, at *1 (2010). 2016 WL 4136982, at *3.
Section 469(c)(1) provides that all activities in which a taxpayer does not materially participate are passive.
Section 469(c)(2) provides that all rental activities are passive, irrespective of how much a taxpayer participates.
Section 469(c)(7) provides that, if a taxpayer qualifies as a real estate professional, then Section 469(c)(2) does not apply.
Significantly, Section 469(c)(7) does not provide that, if a taxpayer qualifies as a real estate profession, then Section 469(c)(1) does not apply. Thus, even if a taxpayer qualifies as a real estate professional, the taxpayer still must show material participation in rental activities in order to avoid classification of rental activities as passive. Stated in other words, even if a taxpayer qualifies as a real estate professional, rental activities are not thereby automatically deemed to be nonpassive. This is the proposition that the Graggs argued and lost before the Ninth Circuit. The Graggs plainly were wrong.
Real estate professionals are allowed to deduct rental losses from their taxable income only if they materially participate in rental activities. To prove participation it is strongly suggested you keep a log and other supporting evidence of your real estate activities.

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