Tax Tip #305

Many rental property owners are surprised to learn that federal tax law often restricts their ability to deduct losses. However, if you can qualify for the real estate professional (REP) exception, you may be able to turn otherwise suspended losses into immediate tax savings.

To be eligible for the REP exception: 

• Spend more than 750 hours during the year delivering personal services in real estate activities in which you materially participate
• Those hours must be more than half the time you spend delivering personal services (in other words, working) during the year. 

The next step is the material participation (MP) test:

• Spend more than 500 hours on the activity during the year.
• Spend more than 100 hours on the activity during the year and make sure no other individual spends more time than you.
• Make sure the time you spend on the activity during the year constitutes substantially all the time spent by all individuals. 

If you qualify as a REP and meet the MP test for a property, losses from the property are generally deducted in the current year. 

If this may apply to you, reach out to a team member for more information.