The tax laws that govern what you are able to deduct if you own rental property can be quite difficult to understand. The fact the matter is, there are certain deductions which would be of benefit to you and you may be able to take full advantage of them, if you meet the criteria that allow you to do so. One of those advantages is being able to use the real estate professional rules in order to deduct losses associated with rental real estate against your ordinary income. How is this possible?
If you meet certain eligibility requirements, you would be able to deduct the losses from the rental real estate from the income on your annual federal income taxes. In doing so, you would be able to deduct the losses against any of your current wages, including commissions, dividends and interest.
In order to determine if you qualify for this deduction, you need to ensure that you meet the requirements to be considered a real estate professional. There are 2 requirements which need to be met, but there are different ways in which you may be able to meet them.
750 Hours - In order to meet this requirement, you must perform a minimum of 750 hours of service in businesses or trades that are associated with real estate. It is important to understand, these may be combined in order to help you to meet that requirement.
An example of how you may be able to meet the 750 hour requirement by combining your work is in the fact that you can count any real estate property work throughout the year. This would include the development, redevelopment, acquisition, construction, reconstruction, management and rental operations. You can also count the time that was spent in any brokerage trade or business that is associated with real estate. As long as you can combine for a minimum of 750 hours throughout the course of the year, you may be able to qualify under this eligibility requirement.
50% - Another eligibility requirement for qualifying as a real estate professional is that you must have engaged in real estate business or property trades for more than 50% of the services that you provided throughout the year.
There are also other considerations for using the real estate professional rules to claim a deduction for losses. This would include participating materially in the real estate throughout the course of the year. In order for you to meet this qualification, you need to meet a minimum of one of seven material participation tests. The most common of those tests follow.
1. For more than 500 hours throughout the year, you have managed and operated rental property.
2. You have significantly contributed to the work that is necessary for the operation and management of the rental real estate.
3. During the course of the year, it is necessary for you to work in excess of 100 hours with no one who participates more than the landlord. This would include independent property managers and non-owner employees.
If you have additional questions about using the real estate professional rules to deduct losses on your taxes, you can contact Tax Force Inc. We would be happy to assist you in making sure not only that everything is filed properly, but that you have a good understanding of your tax situation.