Real Estate Rental Losses-You MUST Have The Proof

August 16th, 2021 at 2:11 PM

If you own rental properties that can provide you tax shelter with their losses and your Form 1040 adjusted gross income is less than $150,000 (without considering rental losses), you need to overcome the tax code passive loss rules.

Here are some important points.

Keep a time log. Make sure your time log proves you pass the

  1. more-than-half-your-work-time test

  2. more-than-750-hours test, and

  3. material participation tests for each of the properties, or group, if you elected to group them.

Tax law contains seven possible material participation tests. You materially participate in a property if you pass any one of the seven tests. But realistically, it’s likely you have only two of the seven tests that apply, as follows:

1. You (and your spouse, if married) materially participate in a rental if you perform substantially all the work on the rental.
2. If others participate in the rental, you (and your spouse, if married) materially participate if (a) you participate in the rental 100 hours or more and (b) no other individual participates more than you.

Consider this example. You rent out a single-family home. You hire a gardener who comes weekly to mow the lawn and take care of the landscaping.

To materially participate in this rental

• you must materially participate for 100 hours or more, and
• that must be more than the gardener spends working on this rental home.

Do you have proof? You need proof of not only your work time but the work time of your gardener.

Mark S. Fineberg, CPA