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Income and losses from investment real estate or rental property are passive by definition — unless you’re a real estate professional. Why is this important? Passive income may be subject to the 3.8% net investment income tax (NIIT), and passive losses are deductible only against passive income, with the excess being carried forward.
To qualify as a real estate professional, you must annually perform:
Each year stands on its own, and there are other nuances. If you’re concerned you’ll fail either test and be subject to the 3.8% NIIT or stuck with passive losses, consider increasing your hours so you’ll meet the test. (Special rules for spouses may help.) Also be aware that the IRS has successfully challenged claims of real estate professional status in instances where the taxpayer didn’t keep adequate records of time spent.
If you’re not sure whether you qualify as a real estate professional, please contact Doeren Mayhew’s tax advisors in Michigan, Houston and Ft. Lauderdale. We can help you make this determination and guide you on how to properly document your hours.
This publication is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional opinions on specific facts for matters, and, accordingly, assumes no liability whatsoever in connection with its use. Should the reader have any questions regarding any of the news articles, it is recommended that a Doeren Mayhew representative be contacted.
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