Source: http://traderstatus.com/tax-planning/preparation-issues/landlord-classifications/
Timestamp: 2018-01-17 01:03:28
Document Index: 163208048

Matched Legal Cases: ['§1411', '§469', '§469', '§469', '§469', '§469', '§469', '§469', '§1', '§1', '§1', '§469']

Landlord Classifications – TraderStatus.com
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If the rental real estate property is used as your personal residence or even if it is used for only part of the year as your personal residence, then there are additional restrictions and limits on the deductibility of the rental costs. See Rental Property for some detail regarding this.
Advance rent and Prepaid rent and Deferred rent.
Otherwise, generally by default, rental real estate property results in passive income (loss) and net investment income (loss) for IRS purposes. Generally, the deductibility of such losses are limited, but can be deferred to be deducted in a future year.
There are three classifications for an individual to hold rental real estate:
An investor who does not actively run the real estate rental property (such as a condo run by a management company, or a time-share property)
A 10% or more owner of the real estate rental property, who actively makes independent judgments on what to do.
A qualified materially participating real estate professional, making a living with development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or sales/brokerage. see Forbes and CRE Online and The Tax Advisor articles.
The income of qualified real estate professional is non-passive. If it is earned in the ordinary course of a trade or business, then it is also exempt from the Net Investment Income Tax (NIIT or IRC §1411 Obamacare tax)
To be earned in the ordinary course of a trade or business, then just like the rules for Trader Status, the real estate taxpayer’s involvement must be regular, continuous and substantial.
If a real estate professional participates in a rental real estate activity for more than 500 hours per year – or for more than 500 hours in each of five of the last ten years – then the rental income associated with that activity will be presumed to be derived in the ordinary course of a trade or business.
Generally, a loss from a passive activity is not currently deductible unless one of the following applies:
○ But generally passive income from a publily traded partnership does not count, pursuant to IRC §469(k)
There is a qualifying disposition (a sale of the property to an unrelated party) under IRC §469(g); or,
The taxpayer meets the requirements of IRC §469(c)(7) for real estate professionals.
see IRS Audit Techniques Guide Chapter 2, Rental Losses
A limited partner in an activity (IRC §469(i)(6)(C)).
A taxpayer who has less than 10 percent ownership (IRC §469(i)(6)(A)).
A trust or corporation. The $25,000 is available only to natural persons.
The $25,000 rental real estate allowance under IRC §469(i) requires individuals to offset losses from rental real estate without necessarily having passive income.
A taxpayer must deduct up to $25,000 in rental real estate losses as long as the taxpayer actively participates and MAGI is less than $100,000. If MAGI = $110,000, the $25,000 allowance is reduced by $5,000 to a $20,000 maximum allowance. Once MAGI exceeds $150,000, the special allowance is no longer available.
Modified Adjusted Gross Income (MAGI) is Adjusted Gross Income (AGI) computed without any passive losses and several other minor modifiers.
Once MAGI exceeds $150,000, the special allowance is no longer available.
more than 50 percent of his/her time on his own real estate activities (a 5% owner /employee may count his hours on the job); AND,
more than 750 hours in real estate activities in which you materially participate.
see Charles Gragg v. U.S.
When determining whether a person qualifies, each of their rental real estate interests are treated as a separate real estate activity unless a IRC §469(c)(7)(A) grouping election is made to treat all those interests as a single activity. Because of this rule, if someone has
multiple rental properties and if they don’t make the election, they must establish material participation for each property separately including the 750-hours test for each property separately in order to qualify as a real estate professional with respect to that property.
In order to materially participate in either a separate or aggregated rental activity, the taxpayer must pass one of the following seven tests found in Reg. §1.469-5T:
The individual’s participation in the activity for the taxable year constitutes substantially all of the participation in such activity of all individuals (including individuals who are not owners of interests in the activity) for such year;
The activity is a significant participation activity (within the meaning of paragraph (c) of this section) for the taxable year, and the individual’s aggregate participation in all significant participation activities during such year exceeds 500 hours;
A real estate professional must materially participate in each rental activity for the loss to be deductible. see Reg. §1.469-9(e)(1)
Exception: A real estate professional may file a written election to aggregate all rental real estate activities (including real estate held through passthrough entities) as one activity. As a practical matter, many elections were filed in 1995. However, the taxpayer may file the election in any year, and it will bind future years from that point. See Reg. §1.469-9(g) and IRC §469(c)(7)(A)
The due date for filing the election is the due date for filing the tax return (including extensions). An additional 6 months may be available by using Rev. Proc. 2011-34.
Losses upon sale or disposition of a parcel cannot be recognized (deducted) until all rental activities in the aggregated group are sold or disposed of.
Chief Counsel Advice CCA 201428008