How to deduct more than $25,000 in passive losses per year

Real Estate Agent with BANCROFT REALTY LLC 0637667

Real Estate Professional Passive Loss Exemption

Passive Loss Limits

If you are invested in multiple residential properties and an active buy/fix/ hold investor, then you will come up against the $25,000 passive loss limit imposed by the tax code in section  IRC § 469(g).  It is imperative that you understand IRC § 469(c)(7) for real estate professionals.IRS Money

My Story

Here is my story.  Two years ago I first became very active in buy/fix/ hold.  I studied the rules on capital gains vs. expenses.  I trained my contractors on what to do.  I kept meticulous records.    I was set to deduct my passive losses against my regular income and did I need it.  My husband got a new job and as part of the severance he had to cash in his stock options or lose them.  We had a lot of capital gains and did not withhold money to pay the taxes since we did not expect a job change.  We sent our records to our accountant and crossed our fingers. 

The day came when the phone rang.  I knew it was our accountant before I picked it up.  I asked, “Bob, give it to me strait.”  He said we owed over $15,000 in taxes.  When I picked myself off the floor, I asked him how that could be?  We had so many deductions?  We kept good records.  I expected something but not that much. 

He said, “Jody you are maxed on your passive loss deductions.  Your AGI put you over the amount for the $25,000 loss.  We will carry the deductions to the next year.” 

“No way Bob! I cannot be maxed on the passive loss deductions.  I am a real estate professional.”

“I know.  You gave me your Realtor® number but that does not count.”

“Bob, you did not understand me.  I am an agent but I AM a real estate professional.  My occupation on the tax form says property manager.  According to IRC § 469(c)(7) for real estate professionals I am exempt from passive loss limitations.”

Bob agreed to re-figure my taxes and said he would get back with me at the end of the week. Later that week he called and said we will get about $5,200 back on our return.  After I came down from the ceiling I thanked Bob and asked for him to e-file our return.  Knowing this one section of the tax code saved me over $20,000 in taxes in one year.

Passive Loss Exemption Rules

Here’s what you need to do to qualify as a real estate professional.  It is not about being a Real Estate agent.  To qualify as a real estate professional, the taxpayer must spend:

  •            more than 50 percent of his/her time in real estate activities; AND,
  •            more than 750 hours in real estate activities.
  •            A real estate professional must materially participate in each rental activity for the loss to be deductible

How to qualify as a real estate professional

To be a real estate professional, you must spend the majority of your time in real property businesses: 

  •            Development or redevelopment
  •            Construction or reconstruction
  •            Acquisition or conversion
  •            Rental
  •            Management or operation
  •            Leasing
  •            Brokerage, not sales agent

One spouse alone must meet both tests. In addition, services performed as an employee do not count unless the employee is at least a 5 percent owner in the real estate business. 

You can show your real estate business activities in many ways. Like with anything, it takes good record keeping. 

Hint:  Reduce the amount of time you work on your job.  You only have to count hours as work that you actually spend doing work.  Deduct vacation time from the total.  Travel time does not count as work.  You can deduct time you spend at meetings.  In all, you may not work a full 40 hours a week for 52 weeks. 

How to achieve the real estate professional time requirements

Capitalize on down time to run your real estate business.  Education is material and necessary for your job.  You can listen to tapes to and from work.  You can search for properties during lunch.  Going to conferences and networking also count.  Did you show a property?  Place an ad?  Do tenant screening?  Select, hire and pay a contractor?  These activities will help you get to the 750 hours. 

I document all of my appointments, viewings and travel in my Tax Bot.  I keep all of my expenses in there as well. 

Finally, before rental losses are deductible without being limited by the passive losses rules, the taxpayer must materially participate in each rental.  This can be difficult to document. 

Group properties to achieve material participation

Fortunately, you are able to make a one-time election to treat all of your rental properties as a single activity.   This filing is done once.  Add the statement to your tax return.  Even if you outsource the property management, be sure to have the contract state that you have final say on all tenants and that you must approve all expenses over a certain amount.  I would do this as a matter of good business practice. 


Learning these rules and executing a plan can save you thousands in taxes.  I was able to put money down on another property with my tax savings for the one year alone.  


If you found this article useful maybe you will enjoy

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How to Sell Your Existing Home With Home Office Tax Free

How to help your child pay for college and get a tax deduction


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Sybil Campbell
Long and Foster REALTORS® 5234 Monticello Ave Williamsburg, Virginia - Williamsburg, VA
REALTOR® ABR, SFR, SRES Williamsburg, Virginia

Hi JODY WALL, Welcome to Active Rain. This is great information for investors. I think you will find Active Rain to be a community of caring professionals and you will have the opportunity to meet and learn from them.

Aug 27, 2016 12:02 AM #11
Patricia Kennedy
RLAH Real Estate - Washington, DC
Home in the Capital

Hey, Jody!  You're off to a good start!  And I'm glad you knew more than your tax guy - and now so do we.

Welcome to ActiveRain, and hope you keep posts like this coming!

Aug 27, 2016 12:12 AM #12
Sam Shueh
(408) 425-1601 - San Jose, CA
mba, cdpe, reopro, pe

Very informative and to the point with IRS code number. I have it  book marked for future reference.



Aug 27, 2016 12:15 AM #13
Will Hamm
Hamm Homes - Aurora, CO
"Where There's a Will, There's a Way!"

Hello Jody Wall and Welcome to the rain where we all learn from each other and help each other.  This is such a great first blog that I will follow you for more great ones.  Make it a great day!

Aug 27, 2016 01:05 AM #14
Harry F. D'Elia
RentVest - Phoenix, AZ
Investor , Mentor, GRI, Radio, CIPS, REOs, ABR

We would like to welcome you to the AR community. Looking forward to more posts.

Aug 27, 2016 02:34 AM #15
Adam Feinberg
NYC Condo, Co-op, and Townhouse specialist

Great post exemplifying how understanding tax law can make a difference.

Aug 27, 2016 08:16 AM #16
Michael J. Perry
KW Elite - Lancaster, PA
Lancaster, PA Relo Specialist

I only learned about this a couple of years ago !!! This post NEEDS TO BE FEATURED !!!

Aug 27, 2016 11:33 AM #17
Robert Vegas Bob Swetz
Realty ONE Group - Las Vegas, NV
Las Vegas Henderson Homes for Sale

Welcome to the Activerain network and congrats on your first post!

Aug 27, 2016 03:06 PM #18
Melissa Jackson
Citiwide Alliance Realty - Weatherford, TX
Helping You Make The Right Move

Welcome to Active Rain JODY WALL  Great topic & I'm looking forward to reading more from you. 

Aug 27, 2016 03:13 PM #19
Jon Quist
Tucson's BUYERS ONLY Realtor since 1996

Welcome to AR. Pretty impressive first post, I have to say. Congrats.

Aug 28, 2016 02:00 AM #20
Gita Bantwal
RE/MAX Centre Realtors - Warwick, PA
REALTOR,ABR,CRS,SRES,GRI - Bucks County & Philadel

Good luck on active rain.

Aug 28, 2016 06:27 AM #21
Inna Ivchenko
Barcode Properties - Encino, CA
Realtor® • Green • GRI • HAFA • PSC Calabasas CA

Your attention to details and recording all your activities and expensive is impressive. Thanks for sharing your story. 

Aug 28, 2016 04:20 PM #22
Inna Ivchenko
Barcode Properties - Encino, CA
Realtor® • Green • GRI • HAFA • PSC Calabasas CA

Also, since it seems your first blog I wanted to welcome you to the Rain family. All the best! 

Aug 28, 2016 04:20 PM #23
Kathy Goldman
REVA Online | SEO Boost For Real Estate, Social Media Marketing for Real Estate and Real Estate Blogging Expert - Waukesha, WI
Social Media & Marketing for Real Estate

This was a fantastic Post, Jody Wall! It's exciting to see so many people who have read the post and have agree with you AND have decided to bookmark the post! 

Aug 29, 2016 03:54 AM #24
Kathy Goldman
REVA Online | SEO Boost For Real Estate, Social Media Marketing for Real Estate and Real Estate Blogging Expert - Waukesha, WI
Social Media & Marketing for Real Estate

BTW, congratulations on a great first article and welcome to ActiveRain! Our Rainers are the best and they know an awful lot! Thanks for sharing your knowledge too! I have clicked the "Follow" button on your profile so I can catch additional posts! 

Catch ya later. Ciao!

Remember our Real Estate Blog Experts Motto:  

"If it doesn't make you money, you shouldn't be doing it!"

Aug 29, 2016 03:55 AM #25
Praful Thakkar
LAER Realty Partners - Andover, MA
Andover, MA: Andover Luxury Homes For Sale

Welcome to ActiveRain Jody Wall .

This is The Best place to learn, share and build relationships with like-minded professionals.

Aug 29, 2016 04:23 PM #26
Praful Thakkar
LAER Realty Partners - Andover, MA
Andover, MA: Andover Luxury Homes For Sale

I have bookmarked this post - and will check again if I am missing any of these deductions... Thanks for sharing.

Aug 29, 2016 04:24 PM #27
CA COASTAL ESTATES Lauren Selinsky Perez CRS
California Coastal Estates - Aliso Viejo, CA
"Your Real Estate Broker" #oclauren

Excellent info here. I bookmarked to come back as well.

Welcome and following you now.

Lauren Selinsky

Aug 29, 2016 04:35 PM #28
Sharon Kowitz
CRS-SRES-ABR-GRI-E-Pro-CREN Fonville Morisey Cary, NC - Cary, NC
Cary, NC Relocation Specialist ~ Buying or Selling

Welcome to Activerain and congratulations on your first post, I wish you the best of luck with your business

Aug 30, 2016 03:22 AM #29
Mery Fernandez Empire Network Realty Luxury Brokerage
Empire Network Realty INC. - Orlando, FL
The Rise of An Empire, Let's Build Yours!

Hi Jody! Welcome to the world of Activerain, may your blogging  create a whole new chapter in your Real Estate Career.

Aug 30, 2016 03:57 AM #30
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