Non Real Estate Professionals are those who are deemed to NOT have an IRS professional tax status spending over 50% of their total hours during the calendar year providing services in the business. This would account for a minimum of 1,040 hours or 26 weeks of a 40-hour week, out of a 52-week year.
Defining the 500 Hours Rule
IRS Regulation 469 allows taxpayers to group entities or rentals to form an appropriate economic unit for the measurement of gain or loss. However, businesses may not be grouped with rentals. Land or buildings held for rentals may not be grouped. No personal activity or portfolio rental activity belongs in the grouping. It is possible that several different rental activities may exist within a single entity. As an example, two unrelated businesses or a business and a rental activity within a single partnership.
An "activity" is not constrained by entity lines. If the taxpayer spends 500 hours among the grouped businesses, even though in different entities, they materially participate in all. The entire 500+ hours could be spent in all one business entity or spread among several related entities.
Prohibiting Acts
- Grouping a rental activity with a trade or business unless:
- either is insubstantial in relation to the other,
- the owner has the same amount of interest in the rental as in the business,
- Grouping real (business) property and personal property rentals unless the personal property is provided in connection with the real property.
While an individual receives a special allowance of up to $25,000 in rental real estate losses each year, the taxpayer must own at least 10% of the value of all interests in the activity during the tax year and must actively participate in the operations of the rental property in both the year the loss is incurred and the year the tax return is filed for. However, if the taxpayer’s modified Adjusted Gross Income exceeds $100,000, it goes down to $12,500. If the modified Adjusted Gross Income goes to $150,000, it is therefore exempt at $0.00, whether you are filing single, married, or married filing separately. The ONLY TIME you can keep these losses carrying forward and using them is to apply them against future passive income from the same activities.
Grouping and Documenting Your Losses
The art of grouping and documenting your losses for tax preparation and potential audit are serious issues when confirming any potential personal tax return losses to prevent red flags and future audit notices. This is why it's important to contact a tax resolution associate with Bookkeeping-Results, LLC if you're interested in learning if you're eligible for the tax break as a non-real estate professional.
Comments(0)