To Be a Real Estate Professional or not to be? The new 2013 3.8% tax on net investment income, became effective as of January 1, 2013. In addition to interest, dividend and property disposition, it also includes rental income. Taxpayers who hold real property for many years, report high rental income, with the decrease of available depreciation on the assets. Pursuant to IRS Code, rental real estate activities are considered passive by default, and in general, losses may only offset passive income. There is an exception to the general rule that rental income constitutes net investment income. In certain situations, however, a taxpayer can overcome the presumption that a rental activity is passive by qualifying as a “real estate professional”. In that case, the resulting income or loss will be classified as nonpassive rather than passive. How do you qualify as a real estate professional? You have to pass 2 tests: 1. More than one half of the personal services you perform in all trades or businesses for the tax year must be performed in real estate trades or businesses in which you materially participate. In layman terms: you must spend more hours on real estate activities than non-real estate activities, AND 2. You must perform more than 750 hours of services during the taxable year in real property trades or businesses in which you materially participate. The taxpayer MUST elect to be taxed as a real estate professional in order to exclude net rental income from their net investment income computation. If you would like more information about this rule, please contact me at 818-461-8900 or hadas@hadassteincpa
Posted on: Fri, 09 Aug 2013 23:16:42 +0000
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