Under the rules established by Congress for PALs, net losses from rental activities do not reduce taxable income without positive net income from other passive activities.
The rule provides relief for rental real estate of moderate income individuals (LLC's and corps. excluded) up to $25,000 of excess losses from all rental real estate activities against portfolio, nonpassive and active income only if the individual actively participates in the management of the property. The relief applies if the individual does not have sufficient passive income after netting all other passive deductions to offset losses from all other rental acivities.
To qualify for the deduction certain the following provisions are necessary before the provision applies.
1. Relief is available for rental real estate only and no other rental activity or other passive activity. A net leased property would be difficult for application of this provision because net leased property is frequently managed totally by the tenant.
2. 10% ownership - Taxpayer must own 10% or more of all interests in the property for the entire year.
3. Active participation - This occurs when the taxpayersss participates in making managment decisions, ie. approval of tenants, rental rates and terms, approval of expenditures for repairs and capital improvements . A property manager can be used, but their actions are not considered when determining active participation by the principal.
4. Individuals only - a partner in a LLC is not eleigible.
One way to flunk the test is to rent a property to your business.
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