Normally, the passive loss rules bar deducting rental real estate losses.
But there are two exceptions. The first is for real estate professionals who spend more than 50% of their working hours and over 750 hours each year materially participating in real estate as developers, brokers, landlords, etc. Joint filers who both participate in real estate can’t combine their hours to meet this test.
The second is for people who actively participate in the rental activity. There are limits to this second exception. Only $25,000 of rental losses can be taken. And this amount phases out as modified adjusted gross income exceeds $100,000.
The Service continues to eye returns that report large rental losses…
Especially those taken by taxpayers claiming to be real estate professionals. Here, a couple, each with a full-time job, deducted rental losses for constructing and leasing out a carriage house. The husband claimed that he spent over 2,500 hours on the activity. The Tax Court believed he devoted lots of hours, but not as many as he claimed. The Court didn’t think he spent more time on the rental than he did at his full-time job. And the couple’s AGI was too high to qualify for the second exception listed above. The Court axed the rental loss
Foradis, TC Summ. Op. 2024-13