Answer: Generally, any rental activity--with little or no personal use--outside of your normal job, profession, or trade.
Answer: Generally, anyone who devotes more than half of his or her personal services, and over 750 hours per year, participating in trades or businesses related to real estate(the e in Estate use to be a capital and should be lower case). Full-time real estate agents, investors, and developers usually qualify, while part-time licensed agents, employees, and investors may not meet IRS requirements for the professional (the word professional (no s) should be in italics) designation. Employees, such as secretaries and bookkeepers, may qualify as professional operatives if they own more than 5% of any company or organization that is primarily involved in real estate related activities.
Answer: The term means “magnified adjusted gross income.” IRS regulations allow “active” taxpayers to deduct up to $25,000 of rental real estate losses against income derived from their primary job, profession, or trade; this if their magnified gross adjusted income (MAGI) is less than $100,000. The $25,000 limit is reduced by $1 for every $2 of magnified adjusted gross income above $100,000. Losses not deductible in any given year are carried forward to subsequent years or until the activity ceases to exist in a taxable transaction to an unrelated party.
Answer: To qualify for the $25,000 loss allowance, the non-passive investor must (1) own at least 10% of the property or business entity; (2) actively participate in the rental process; (3) generally not be a limited partner in the venture, where no controlling interest would be involved and; (4) retain, during the taxable year, at least a 10% share of active ownership in the venture or entity.
Answer: Any or all of the following activities may be interpreted as “active” participation, regardless of the time involved: (1) making management and financial decisions; (2) legitimately arranging for repairs and services and; (3) approving of tenants and establishing rental policies and procedures. Simple analysis of investment potential in a particular venture would normally not be considered a management function and, therefore, not “active” participation. In this regard, net leases are also scrutinized by the IRS to screen out questionable Passive Activity expenses, beyond the usual allowable write offs for taxes, interest, and depreciation. The assumption in a net lease is that management duties have devolved to the lessee, therefore wiping out any legitimate claim of “active” participation by the lessor.
Answer: Properties rented out for an average of seven days or less in a taxable year are not considered by the IRS to be rental real estate and are therefore not eligible for the $25,000 and active participation deduction against your main source of income. Further, rental activity in resort areas is customarily assigned to local property management firms, thereby making non-passive claims for a $25,000 deduction difficult to prove. Losses in such cases are suspended until the property is sold.
Answer: If you use your vacation home more than 14 days a year, or for at least 10% of the days rented at a fair price, then no deductions are allowed and no income is reported on your tax return; however, mortgage interest and taxes are treated as if the home was a rental property. If rental activity exceeds 14 days, deductions must be pro-rated between personal and rental use.
Answer: In this case, you home would be considered a rental property with personal use and not a residence. Rental expenses are allocated between rental and personal use. No expenses, other than taxes, are deductible. Since the property is not considered a personal residence, no mortgage interest can be written off.
Answer: The excess will be carried forward and applied against future income from the same rental property, thereby reducing your future tax liability on that specific real estate. The personal use portion of the property would be pro-rated when figuring interest and tax deductions.
Answer: Yes, if a fair market price is paid. This tactic is often helpful when there is a need to withdraw taxable money from the business for any number of reasons. The shelter of depreciation can also provide a tax benefit to you through the renting of property to yourself. Such income, however, is non-passive and cannot be used to offset passive losses from other property. Any losses from a self-rented property are considered passive and are therefore of significant benefit to the owner through allowable tax deductions.
These questions and answers are for informational purpose only. You are advised to consult with a Tax Attorney or CPA for confirmation of accuracy and to determine if changes in tax laws have occurred.
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