Rental Property - National Association of Enrolled Agents

The Expert in Tax Education
Rental Property
Proper Classification and
The Expert in Tax Education
Rental Property
Presented by XXXX
Developed by Timothy Dilworth EA, CPA,
NTPI Fellow
Summer 2014
The Expert in Tax Education
Residential Rental Property
• Mixed Use Home
• Personal Use
• Rental Property
• Dwelling Unit used as a home
• Rental Property with active participation
• Short-term Rental with material participation
• Substantial services provided in conjunction with
• Qualified Joint Venture
• Partnership
• Corporation (S- or C-)
• Self Rental
Mixed Use Property
• Personal Use Property
• 15 days or more of personal use
• Rented < 15 days
• Income not reported
• Allowed Expenses – Schedule A
• Rental Property
• Personal use less than greater of 14 days or 10% of days rented at
• Rental income on Schedule E
• Allowed expenses allocated between Schedule A and E
• Dwelling Unit Used as Home
• Personal Use more than greater of 14 days or 10% of days rented
at FMV
• Rental income on Schedule E
• Allowed expenses allocated between Schedules A and E
• Other indirect expenses cannot create a loss
Tax Court Method
• Interest and taxes allocated based on rental days
divided by entire year (365)
• Maintenance and other direct expenses allocated by
days occupied – rental vs. personal
• Bolton, 51 AFTR 2d 83-305 (9th Cir. 1982)
• Mortgage interest only allowed on qualified personal
residence – first and/or second home.
• Property taxes are allowed on all properties owned by
a taxpayer.
• Schedule E gain vs. loss
Deductibility of Losses
• Passive Loss Limitations – Form 8582
• Most rental activities are passive – income received mainly for use
of tangible property rather than for services
• Rental activity with active participation allowed limited loss per year.
• Disallowed amounts carried over to be used in future year or when
property sold
• Basis Limitations – Basis worksheet
• Losses not allowed beyond taxpayer’s basis in the property
• At Risk Limitations - Form 6198
• You may be subject to the at-risk rules if you have:
• A loss from an activity carried on as a trade or business or for the
production of income, and
• Amounts invested in the activity for which you are not fully at risk.
Active Participation
Active participation. You actively
participated in a rental real estate activity if
you (and your spouse) owned at least 10% of
the rental property and you made
management decisions or arranged for others
to provide services (such as repairs) in a
significant and bona fide sense. Management
decisions that may count as active
participation include approving new tenants,
deciding on rental terms, approving
expenditures, and other similar decisions.
Maximum Special Allowance
• Must have active participation
• $25,000 for Single, Head of Household and
MFJ filers
• $12,500 for MFS filers
• AGI must be less than 100,000 or less than
50,000 for MFS
• Loss limited to 50% of difference between
150,000 and MAGI (75,000 for MFS)
• Unused amounts carried over on Form 8582
• Carryovers used when less than MSA created
in current year or if income drops allowing
losses previously limited by MAGI
Real Estate Professionals
• More than 50% of their personal services during
the tax year are performed in real property trades
or businesses in which they materially participate.
• And, they spend more than 750 hours of service
during the year in real property trades or
businesses in which they materially participate.
• For purposes of material participation, each
activity is considered separately, unless:
• The taxpayer elects to treat all interests in rental
real estate as one activity.
Material Participation
• An activity is not passive if you participate materially
• Material participation tests
• >500 hrs of participation
• Your participation was substantially all the participation of all
individuals for the tax year, including that of individuals with no
ownership interest.
• You participated more than 100 hrs and at least as much as any
other individual, including others with no ownership interest.
• The activity is a significant participation activity and you
participated in all significant participation activities for more than
500 hours.
• You materially participated in the activity for any 5 of the 10
previous years.
• The activity is a personal service activity in which you materially
participated for any 3 preceding tax years.
• Based on all facts and circumstances, you participated in the
activity on a regular, continuous, and substantial basis during the
year (>100 hrs).
• Keep mileage logs – Where have we heard
this before!
• Keep log of days and hours worked by
taxpayer and others (including spouse)
• Separate logs for each property and
consolidated log (each property considered
separately for material participation, unless
you elect to consolidate.
• Log time spent at rental doing work on
property vs. personal time
• Keep records back at least 10 years
Rental Activities not automatically
treated as Passive
• Average rental period of 7 days or less
• Average period of rental is 30 days or less and you
provide significant personal services
• You provide extraordinary personal services in making
the rental property available for customer use
• The rental is incidental to a non-rental activity
• You customarily make the rental property available during
defined business hours for nonexclusive use by various
• You provide the property for use in a non-rental activity in
your capacity as an owner of an interest in the
partnership, S-Corp, and joint venture conducting that
Passive vs. Active and Self Rentals
• Note that losses from Passive activities cannot offset income from nonpassive activities
• Temp. Regs. Sec. 1.469-2T(f)(6) provides that an amount of the taxpayer's
gross rental activity income for the tax year from an item of property equal
to the net rental activity income for the year from that item of property is
treated as not from a passive activity if the property is:
• Rented for use in a trade or business activity in which the taxpayer
materially participates for the tax year; and
• Is not described in Temp. Regs. Sec. 1.469-2T(f)(5), covering property
rented incidental to a development activity.
• Under the self-rental rule, the rental losses are still considered to be passive
losses deductible only to the extent of passive income, while the income is
treated as "active income" (Carlos, 123 TC 275 (2004)).
• Thus losses from the self rental can only offset income from that same
• Additionally, income from the self rental cannot be offset by passive losses
from other rental activities.
Publication 527
Publication 925
IRC Section 280A
IRC Section 465
IRC Section 469
Reg 1.469
Temp. Regs. Sec. 1.469
Instructions for Forms 8582 and 6198
Carlos, 123 TC 275 (2004)
Bolton, 51 AFTR 2d 83-305 (9th Cir. 1982)
Presentation developed by
Timothy Dilworth, EA, CPA, NTPI Fellow
Timothy Dilworth EA, CPA and an NTPI Fellow has been
the tax manager at a CPA firm in Michigan for the past 7
years. He has been teaching tax classes in Michigan for
10 years and served as Education chair for the Michigan
Society of Enrolled Agents for 4 years. Dilworth served
on the NTPI Planning Committee for the past two years,
is the Immediate Past President of MiSEA, and is
currently serving on the NAEA Board of Directors.
NAEA created this educational program as part of its
firm commitment to providing up-to-date, convenient
continuing education that focuses on the issues that
members identify as top priorities. Members are invited
to suggest further areas of study or to submit
presentations by contacting [email protected]
National Association of Enrolled Agents
1730 Rhode Island Ave, NW Ste 400
Washington, DC 20036
Toll free: 855-880-NAEA