b'Rental Income: Passive v. Non-PassivebyDerrick FooteDuner and Footearticle is specifically focused on realThe Internal Revenue Code requires both estate investors receiving rental incomecriteria to be met to qualify as a real estate ntroduction and the steps needed along with theprofessional.The first criteria attempts to Investing in real estate rentals is a passivedocumentation to substantiate that themake it difficult for full-time professionals activity under Internal Revenue Code (IRC) real estate activity is non-passive; therebyin different businesses from qualifying. 469(c)(2).The general rule is passive incomemaking losses deductible against ordinaryPursuant to the first criteria, a full time is currently taxable and passive lossesincome.This article is for individualprofessional would need greater than (including suspended loss carryforwards)taxpayers, but it should be noted these1,000 hours of real estate services based are deductible up to the amount of passiverules may also apply to a trust. on spending approximately 2,000 in an income recognized during the year.Forexisting occupation.If the taxpayers purposes of deducting passive losses otherReal Estate Professional only profession is as a real estate investor/income from interest, dividends, annuitiesmanager, then meeting the 750 hours or royalties not derived in the ordinaryThe first key part is that an individual needsrequirement of the second criteria would course of a trade or business1 cannot beto qualify as a real estate professionalsatisfy the first criteria.If the taxpayer is used to offset passive losses.Therefore,which then allows the real estate activityengaged in other trades or businesses, if passive losses are being generated andto be treated as non-passive.The rules forthe taxpayer will need to do the math to there is no corresponding passive income,treating rental real estate activities of realdetermine if they qualify under the first the passive losses will become suspended.estate professionals as non-passive arecriteria.Most likely if a taxpayer is not Unused passive losses are suspendedcomplex and often misunderstood.Theinvolved in a different trade or business on criteria needed to treat a real estate activitya full-time basis and can meet the 750-hour until passive income is generated or theas non-passive3 is as follows: rule then they should meet the 50% test activity associated with the suspendedunder the first criteria.loss is disposed of in a taxable transaction.21.More than 50% of the personal These suspended passive losses begin toservices performed by the taxpayer inReal property trade or business, under accrue in the form of passive loss carryoversall trade or businesses during the taxIRC Section 469(c)(7)(C), means any real that carryover indefinitely until used.Itsyear are performed in real propertyproperty development, redevelopment, frustrating when losses are generated andtrades or businesses in which theconstruction, reconstruction, acquisition, go unutilized due to the passive loss rules.taxpayer materially participates, and conversion, rental, operation, management, There are certain criteria, if met, whereleasing, or brokerage trade or business. a taxpayer can treat their rental activity2.The taxpayer performs more than 750This definition is very important, as not all as non-passive.By meeting the criteria,hours of services during the tax yeara taxpayers activity in their real property a taxpayer can treat their activity asin real property trades or businessestrade or business can be used meeting non-passive and not be subject to thein which the taxpayer materiallythe 750 hours or 50% requirement.What limitations under the passive rules.Thisparticipates. continued on page 36Points of InterestFall 2019Page 35'