Tax Tip – Special Rules for Real Estate Professionals

Posted byDon Fitch, CPAPosted in1040, Actively Participate, eFile, Filing Requirements, Material Participation, Net Investment Income Tax, Nonpassive Income, Passive Activity, Real Estate Professional, Rental Losses, Rental Real Estate Activity, Rental Real Estate Expenses, Rental Real Estate Losses, Safe Harbor, Schedule E, Tax Tips by Don Fitch, CPA, Trade or BusinessTags:

Code Sec. 469(c)(7) and Reg. Sec. 1.469-9 provide special rules for real estate professionals.

Brenda Fitch Real Estate Professional
Brenda Fitch Real Estate Professional

If a taxpayer meets the requirements to be a real estate professional under Code Sec. 469(c)(7)(B), the taxpayer’s interests in rental real estate are no longer subject to the passive activity loss rules and the taxpayer’s rental real estate activities are not passive activities if the taxpayer materially participates in each of those activities. However, a taxpayer who qualifies as a real estate professional is not necessarily engaged in a trade or business (within the meaning of Code Sec. 162) with respect to the rental real estate activities.

If the rental real estate activities are Code Sec. 162 trades or businesses, the rules in Code Sec. 469(c)(7) and Reg. Sec. 1.469-9 apply in determining whether a rental real estate activity of a real estate professional is a passive activity for purposes of Code Sec. 1411(c)(2)(A). However, if the rental real estate activities of the real estate professional are not Code Sec. 162 trades or businesses, the gross income from rents derived from that activity will not be excluded under Code Sec. 1411(c)(1)(A)(i) by the ordinary-course-of-a-trade-or-business exception. The ordinary-course-of-a-trade-or-business exception does not apply because the rents are not derived from a trade or business. Thus, the rental income is subject to the net investment income tax.

However, the net investment income tax regulations provide a safe harbor rule for certain real estate professionals. Under the safe harbor, gross rental income of such real estate professionals is deemed to be derived in the ordinary course of a trade or business, and thus not subject to the net investment income tax (Reg. Sec. 1.1411-4(g)(7)). See Tax Tip – Safe Harbor for Certain Real Estate Professionals.

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(Updated 02/25/2021 05:54)

Published by Don Fitch, CPA

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