Taxation laws are generally complex wherever an investor is looking for investment property and the US is no different to many other countries; however, a court decision made recently will make it simpler for many people to become qualified as real estate professionals so that they can fully deduct their losses when they rent out real estate.
Previously, under the IRS passive loss rules, which were considered to be a very confusing area of taxation, investors renting out property could only deduct up to $25,000 of losses (known as 'passive activity losses') on rentals from other non-passive income. This might include a salary, or income from other businesses. This amount is phased out if the rental owner's adjusted gross income is over $100,000.
There is now, however, a special exemption from these passive loss rules that real estate professionals can qualify for. This means that any amount of rental losses in a year can be deducted from other income, no matter how high the income for that year may be.
The key thing for investors to remember is that to qualify to become a real estate professional they must spend more than half their working hours over the year working in a real property business, or more than one real property business. If a joint tax return is filed with a spouse, the spouse can work those hours.
In addition, the investor (or spouse) has to spend over 751 hours per year in a real property business or businesses where they materially participate.
