Client has 8 residential rentals. He left his 40-hr/wk job in April 2004 and spent all of his “working” time in the remaining months managing his rentals, including new purchases and sales. It appears that he meets the criteria for a professional in real estate. His joint AGI exceeds $100,000 and the real estate losses exceed $25,000. Classification as a RE Pro would mean a significant difference in tax liability. Is this classification selected by simply checking non-passive activity on Sch E, p. 1? Thanks.
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abby
If he meets the Real Estate Professional criteria it could be as simple as marking the sched E - your software should give you a choice, though, of marking him a Real Estate Professional, rather than just Non-Passive, so that the bottom of sched E pg 2 will be filled in properly.
The trick is usually in meeting the Material Participation rules for EACH rental. If he is the only one managing them, he likely will meet this criteria, but check those rules.
There is an election to aggregate all the activities and that can be useful if the client meets the Real Estate Professional criteria, but can't meet the Material Participation criteria for each and every property. The election, though, cannot be revoked unless there is a change in the activity that would warrant such a revocation, such as getting out of the business and hiring a manager. -
RE Business
Would he now be in the business of real estate and use a Sch C. Knew of a situation where a man fought with the IRS saying his rental was investment properties, IRS disagreed as he had about 18 rental properties and IRS concluded that he was in the business of renting and not investment.Comment
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jim mcg
Per IRC Sec 1402(a)(1) rental income from real estate is not subject to SE tax regardless of the number of properties the taxpayer owns unless the rental are received in the course of a trade or business as a real estate dealer.Comment
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