Can you deduct your rental property losses from other active income?
Posted by Tony Kawaguchi, RA on Wednesday, May 12th, 2010 at 6:27pm.Many people don't realize that you cannot deduct losses from a rental property unless you can meet one of the criteria in these seven tests below. Many real estate investors meet the "materially" participating rule by one or more of the first three tests, but any of the 7 will do:
1. Managing and operating the rental real estate activity for more than 500 hours during the year; or
2. Doing substantially all the work required to manage and operate the rental real estate during the year (probably more than 70% of the total business hours are performed by the landlord); or
3. Working more than 100 hours during the year with no one (including nonowner employees and independent property managers) participating more than the landlord [Reg. §1.469-5T (a)(1)-(3)].
However, an owner can "tack" a spouse's time for calculating the tests mentioned above (e.g., an owner/investor performing 51 hours could add a spouse's time of 50 hours to exceed the 100-hour requirement) [Reg. §1.469-5T(f)(3)]; or
4. Working 500 hours in all the multiple small businesses owned. This is for the taxpayer who has his or her fingers in many pies; or
5. Materially participating for five of the last ten years. The years do not have to be consecutive, and only the 500-hour rule (test 1 above) may be used [Reg. §1.469-5(j)]; or
6. Materially participating in any three previous years in a "personal service activity." These could be in the field of health, law, engineering, architecture, etc. [§1.448T(e)(4)] or any other trade or business in which capital is not a material income-producing factor [Reg. §1.469-5T(a)(6); also §1.469-5T(d)]; or
7. "Facts-and-Circumstances" test. A taxpayer who does not satisfy any of the previous six tests may try to convince the IRS that he or she is materially participating (or not materially participating if he or she wants the income determined passive) based on all the facts and circumstances. One would have to prove participation on a "regular, continuous, and substantial basis
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