Real Estate Investing - Are You Active Or Passive About Your Real Estate Income- Cottonwood CA Homes For Sale
Have you considered how you manage your income properties, spend time and the definition of your business activities effects your income tax liability? Please take a look at the IRC 469... below. The definition of Real Estate Professional may surprise you. Be sure to take a look at the hours and test of services exhibit.
Exhibit 2.4: Real Estate Professionals LAW: Under IRC § 469(c)(7) & Reg. 1.469-9,
- if the taxpayer spends the majority of his time in real property businesses, meeting the 1/2 personal services and 750-hour tests, rental real estate losses are no longer per se passive.
- If the taxpayer materially participates in each rental real estate activity, losses are fully deductible. If not, even though the taxpayer is a real estate professional, losses are passive and deductible only up to $25,000 (if MAGI is less than $100,000). The IRC § 469(c)(7) does not trigger carryover losses from prior years. _____ Verify that one spouse alone meets BOTH of the following tests.
FIRST TEST: Are more than half of personal services in all businesses (T/B) for the year performed in real property T/B and rental real estate? --Real property T/B =
- real property development,
- construction,
- acquisition,
- conversion,
- rental operation,
- management,
- leasing
- brokerage.
- Time spent as an employee in real property activities counts only if the taxpayer is more than a 5 percent owner.
SECOND TEST: Does taxpayer:
- spend more than 750 hours in real property businesses and rentals in which he materially participates? _____ If answer is NO to either of above two tests, IRC § 469(c)(7) does not apply, and losses are generally limited to $25,000. _____ If answer is YES to both tests, apply material participation tests to each rental real estate activity to determine whether each activity is passive or non-passive.
- While not seen often, the taxpayer may have made a one-time election to group all rentals as a single activity. Thus material participation is determined based on the grouped rentals. See IRC § 469(c)(7)(A) and Reg. § 1.469-9(g).
CONCLUSION:
1. Per IRC § 469(c)(7),the following rental real estate activities have been determined to be non-passive and current (but not carryover) losses are fully deductible: ______________Current losses are entered on Schedule E, but not on FORM 8582.
2. Taxpayer is a real estate professional, but did not materially participate in the following real estate activities: _____________ He does, however, actively participate, making management decisions. Losses are entered on FORM 8582 line 1a.
3. Taxpayer does not actively participate in the following rental real estate activities: ______________. Limited partners and Taxpayers who own less than 10 percent cannot rise to the active participation standard. Losses are entered on FORM 8582, line 3b (2b for years before 2002).
Passive Activity Loss (PAL) groupings/regroupings must be reported to IRS
Revenue Notice 2010-13 – Passive Activity Loss (PAL) groupings/regroupings must be reported to IRS effective for tax years beginning on or after Jan. 25, 2010
According to Revenue Notice 2010-13 Passive Activity groupings do not apply to REAL ESTATE PROFESSIONALS.
Who does this affect? In general….. * Taxpayers with many trades/ businesses that want to act as one economic unit; * Trades/businesses that want to combine rental activities as one economic unit * These new rules don’t apply to the rental real estate activities of persons or entities who have made the election relating to real estate professionals
Buyers and Sellers Seeking Real Estate Transaction Assistance With North State Income Properties Please Contact:
Phone: 530-370-1818 Email: steve@chainrealestate.net
This information is deemed reliable, but not guaranteed. This information is provided as an example of the types of information to consider when buying and selling Cottonwood CA Real Estate. This information should not be considered a substitute for the trusted advice of you Tax or Legal Advisor.
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