When Does Owning or Managing Rental Real Estate Make You a “Real Estate Professional?”

Real estate professional status can provide relief from the passive activity loss limitation rules1 and the 3.8% net income investment tax (“NIIT”),2 resulting in significant tax savings.

Rental activities are, per se, passive.3 Passive activity loss (“PAL”) rules limit the ability to offset net losses from passive activities (like rental income) against other nonpassive sources of income (like wages). PALs may be deducted only to the extent of a taxpayer's passive activity income. The remainder is carried forward to be used when the passive activities generate a gain or upon disposal of the property or activity.4 However, a real estate professional who materially participates in a real property trade or business is not subject to the PAL limitation rules and may use rental losses to offset other sources of nonpassive ordinary income.

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