Sunday, February 12, 2012
Special $25,000 Allowance for Passive Real Estate Activities
Internal Revenue Code section 469 limits the deductions and credits a taxpayer may claim from an activities in which he or she does not "materially participate". Losses from passive activities generally may not be deducted against non-passive income, such as wages, portfolio income, or business income. Any unused passive activity losses are generally suspended and carried forward to be used against passive income in future years.
An activity is considered a passive activity if it involves the conduct of any business and the taxpayer does not materially participate in the business activity. An individual materially participates in an activity only if he or she is involved in the activity’s operations on a regular, continuous, and substantial basis.
Except for individuals in the real estate business, passive activities include any rental activity, whether or not the taxpayer materially participates Losses from rental real estate activities are allowed against income from other passive activities, but are not generally allowed against other income (ie., active or portfolio).
Nevertheless, the federal tax code permits an individual to deduct annually up to $25,000 of passive activity losses (to the extent such losses exceed passive activity income) that flow from rental real estate activities in which he or she “actively” participates. The special $25,000 deduction exception is available only to individuals (including individuals that conduct the rental activity through an entity taxed as a partnership or “S” corporation) and is not available to “C” corporations or trusts, and only in certain circumstances to estates.
An individual is not “actively” participating in a rental real estate activity if he or she has an interest that is less than a 10 percent interest in the activity at any time during the year. But having a 10-percent (or greater) interest does not create a presumption of active participation. The active participation requirement does not requires as much participation as the “material participation" standard that applies to non-passive activities. More about the level of participation required in a future blog.
The $25,000 allowance for passive losses from real estate rental activities is phased out ratably as a taxpayer’s adjusted gross income (determined without regard to passive activity losses) increases from $100,000 to $150,000.
Please call or email if you want to know more about the $25,000 alllowance for passive rental real estate activities. Jsenney@pselaw.com or 937-223-1130.
AND ONE MORE THING. How long has it been since you had a Legal Audit? The Business attorneys at PS&E would like to meet with you and do a FREE legal audit of your business. As part of the legal audit, we will work through a checklist with you and identify areas where you may be at risk. If you would like to schedule a free Legal Audit with one of the PS&E attorneys, please send me an email or give me a call. Jsenney@pselaw.com or
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