Rental Real Estate- Here’s 6 Ways to Turn Losses On Immediately
December 4th, 2017 at 5:11 PM
04 Dec Rental Real Estate- Here’s 6 Ways to Turn Losses On Immediately
Two scary words in tax reform are “fairness” and “simplification.”
In most cases, this combination raises your taxes and makes the law more complex.
As you likely know, tax reform is in the air again, and it will bring its share of good and bad news. But for your rental real estate loss deductions, the good news is that the reform being considered does not alter the beneficial strategies here.
In general, rental properties are passive activities subject to the dreaded passive-loss rules. IRS regulations contain six non-rental exceptions to the definition of rentals. In most cases, the non-rental exceptions are, for tax purposes, businesses. To deduct losses from any of the six exceptions, you simply need to materially participate in the activity.
Exception 1—Seven Days or Less
Properties that you rent for customer use for an average period of seven days or less are not rental properties subject to the rental real estate rules. Examples of this type of property include ski cabins, condo rentals, beach homes, lake cabins, tuxedo rental companies, car rental companies, and tool and equipment rental companies.
Exception 2—30 Days or Less
You have a business, like a hotel or motel, when your average period of customer use is 30 days or less and you provide significant personal services with the rental.
Exception 3—Extraordinary Personal Services
You do not have a rental property when you provide extraordinary personal services when making the property available for use by customers (without regard to the average period of customer use).
You provide extraordinary personal services only if the services are performed by individuals and if the use by customers of the property is incidental to the receipt of such services (for example, in hospitals, nursing homes, and boarding schools).
Exception 4—Incidental
You do not have a rental property when the principal purpose for holding the property during a taxable year is to realize gain from the appreciation of the property, and when the gross rental income from the property for such taxable year is less than 2 percent of the lesser of
- the unadjusted basis of such property or
- the fair market value of such property.
Similarly, you do not have a rental property activity when you rent property to a business in which you have an interest and when the property was predominantly used in the business during the taxable year (or during at least two of the five years immediately preceding the taxable year) and the gross rental income from the property for such taxable year is less than 2 percent of the lesser of
- the unadjusted basis of such property or
- the fair market value of such property.
Exception 5—Rental for Customer Use of Facility
Under this exception, you customarily make the property available during defined business hours for nonexclusive use by various customers (for example, golf courses, health clubs, spas).
Exception 6—Providing Property
You do not have a rental property activity when you provide (not rent) property for use in a non-rental activity of your own S corporation or joint venture. The key phrase here is “provide, not rent.”
Example. A shareholder provides property for use by an S corporation in which he has an interest. This non-leasing transaction with the corporation is not a rental. (Also, it is likely a mess for tax purposes because the corporation is a separate legal entity.)
If you have any of the properties above, we should examine the special rules that apply to ensure that you are getting your best tax benefits. If this sounds like a good idea to you, please call me so I can help you with this.