RENTAL REAL ESTATE
You'll need regular and continuous involvement with your rental activities to meet this requirement.
What is a "trade or business"?
This is the type of income you receive if you rent your dwelling for 14 days or less.
What is tax-free income?
Your mixed use dwelling is classified as this type of property (and excess deductions are treated accordingly) when personal use is 14 days or less, or 10% or less of days rented.
What is a dwelling classified as a rental property?
(The amount of personal use determines how you treat your excess rental related tax deductions.)
A dwelling classified as a rental property faces the passive loss rules. Excess passive losses are suspended (unless MAGI is low enough to deduct $25,000). BUT, if property is rented for an average of 7 days or less, property is not passive by default. The tax law treats your activity as a business and all business rules apply (vs rental rules): Report on Sch C, Losses are fully deductible if you "materially participate" in the activity (suspended if you don't). Make sure material participation is documented! $25,000 deduction for "rental property" is not available.
The IRS's Audit Technique Guide (ATG) directs auditors to check THIS on tax returns to see if taxpayers who are claiming the RE Professional designation report something else.
What is the occupation block on tax returns?
My wife and I are retired. We receive about $100,000 of retirement income each year, plus cash from our 5 rental properties. Though they cash flow, with depreciation, we show a net tax loss of about $20,000-$30,000 year and would like to deduct those losses. My CPA said we were not good candidates for RE Professional because of this.
What is the $25,000 loss allowance when MAGI is less than $100,000-$150,000?
No need to satisfy strict requirements of RE Professional.
You'll need regular and exclusive use of this space as your principal place of business to meet this requirement.
What is a home office?
This is the type of property you have if you rent it for >14 days with no days of personal use.
What is a rental property?
Your rental property is, by default, a passive activity, and the losses are limited under Code Section 469 Passive Activity Loss Rules.
BUT, if the average rental days are 7 or less, property is not passive by default.
Your mixed use dwelling is classified as this type of property (and excess deductions are treated accordingly) when personal use is >14 days or >10% of days rented.
What is a Hobby Rental, or a Rental treated as Residence?
(The amount of personal use determines how you treat your excess rental related tax deductions.)
When the law deems your dwelling a residence, the deductions attributable to the rental are limited to gross rental income. You carry forward the deductions in excess of the gross income limit to next year but they can only offset the income of the vacation home property.
Personal portion of mortgage interest and real estate taxes can be deducted on Sch A (subject to limitations).
There are several requirements for THIS, and satisfaction of any one of seven tests will allow a taxpayer to be meet this requirement.
What is material participation?
1. >500 hours
2. TP participation was substantially all
3. TP participated >100 hours and at least as much as anyone else.
4. Activity is a significant participation activity (SPA)
5. TP materially participated for any 5 of the 10 prior years.
6. Activity is a personal service activity, and TP materially participated for any 3 PYs.
7. Facts and circumstances
In TC Memo 1998-17 (Pohoski), Court stated the second test of material participation was not satisfied when taxpayers failed "to put forth some indication of the actual time spent by" third-party non-owners such as THIS.
What are property management companies?
This turns non-deductible household expenses into tax deductions.
What is a home office.
This is the type of property you have if you rent it for >14 days and also use it personally for any number of days.
What is a "vacation home"?
There are two methods for allocating vacation home mortgage interest and real estate taxes. When you have a vacation home treated as a residence, this is the method you may want to use because it allows a larger Sch E deduction of other expenses by transferring more of the mortgage interest and real estate taxes to Schedule A.
What is the Tax Court/Bolton Method?
The Tax Court/Bolton method increases your overall tax deductions only if you are able to deduct the interest and taxes as itemized deductions.
Alternatively, if tax law classes your dwelling as a rental property, any mortgage interest allocated to personal use is non-deductible consumer interest (NOT deductible on Sch A). Therefore, follow the IRS allocation method to reduce personal non-deductible interest.
A taxpayer who does most of the work in a rental, meets Material Participation Test #_____?
What is Test #2, TP participation was substantially all the participation in the activity.
The Tax Court has acknowledged that "reasonable means" is interpreted broadly. Nevertheless, a postevent "ballpark guesstimate" will not suffice for THIS, says the court in TC Memo 2006-193(Lee).
What is recordkeeping and proving hourly involvement?
This is the type of mileage from your home to your first business stop and then from your last business stop back home if you don't have a home office.
What is non-deductible commuting mileage?
But...with a home office, you have no commuting mileage to and from your local rental properties.
Also, when you establish your rental property tax home (with a home office), and if your rentals are outside the area of your tax home, then you can deduct all ordinary and necessary "business travel expenses" like mileage (or airfare), lodging, and meals.
This is what you must do with your expenses if your property use is part rental and part personal use ("vacation home")
What is allocate?
It does not count as personal use when you use your vacation home on days when your principal purpose for such use is THIS.
What is repairs and maintenance?
It may be difficult to prove material participation by a TP when THIS is present.
What is an on-site management company?
In TC Memo 2012-83 (Trzeciak), taxpayer claimed that time travelling to and from rental properties added to the 750-hour and material participation requirements. IRS agent and Appeals officer said No. But it appears from the court records that perhaps the IRS would have entertained travel time had the taxpayer asserted THIS DEDUCTION for rental property activities.
What is Home Office deduction?
Having a rental property home office that qualifies as a principal place of business makes it easier to qualify as THIS, because your time spent on deductible travel to and from your rental properties counts toward the time requirements.
What is a real estate professional?
This what happens to losses when "vacation home" expenses exceed income.
What is "They are limited"?
How they are limited depends on the amount of personal use. See VACATION HOME PT 2.
Your charitable gift of the right to use your dwelling unit for the week results in a negative double whammy. First, the IRS regulations deny a charitable contribution deduction for a gift of the right to use property. Second, the gift results in this type of use under the vacation home rules.
What is personal use.
Consider THIS if you have proof of material participation in each property, but the material participation hours are about 100 hours in each property (i.e Test #2 met for each property).
What is Grouping my Rental Activities?
The election is a statement that is attached to your tax return.
FAMILY FEUD FORMAT:
100 people surveyed. Top 5 answers are on the board. Name some of the IRS tricks to deny the real estate professional designation.
What are:
Other Activities: You have a W-2 wage job requiring full-time hours for which you receive significant compensation. Or, you have numerous other investments, rentals, business activities, or hobbies that absorb significant amounts of time.
Location: The distance between you and your rentals can suggest how much participation could be performed. Naturally, the further the distance the more unlikely a real estate professional could materially participate according to IRS guidelines. While this is not a hard and fast deal-killer, it must be mitigated during an audit.
Third Parties: There is paid on-site management, foreman, supervisor and / or employees who provide day-to-day oversight and care of the operations, including property management companies.
Impact: The majority of the hours claimed are for work that does not materially impact operations. Or, would business operations continue uninterrupted if you did not perform the services claimed.
Health: The taxpayer is elderly or has health issues.