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jgordosea
jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3095
Experience:  I've prepared all types of taxes since 1987.
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Commercial Rental Property Loss Limitation (Schedule ...

Customer Question

Commercial Rental Property Loss Limitation (Schedule E). 2007 I have purchased a Commercial Rental Property and have a loss of $18k. My AGI is $180k. I have spent numerious hours managing this property and this is not my main professional business. The $18k loss is rental income less expenses. According to the IRS rules I need to be a real estate professional to take this loss. What is consider to be a real estate professional. I wish not to carry over this loss, because my AGI will alway be above $150k. Please advise, because I am confused about what is consider a real estate professional. I spent over 50% of my time managing this property.
Submitted: 6 years ago.
Category: Tax
Expert:  MDP replied 6 years ago.

The IRS looks at the following when deciding who is a real estate professional:

Real Estate Professional:

Do you work full-time or part-time as a real estate professional? If the taxpayer has a full-time job working 2080 hours a year in a non-real property business, he must work 2081 on his real property businesses to meet half-personal services test!

Do you own the property

750 HOUR TEST

Time does not count for purposes of the 750 hour test and the half personal services test - unless the taxpayer materially participates in the activity.

Approximately how many hours did you spend working on your rentals in the tax year ? Ask yourself if you have supporting documentation (appointment books, diaries, calendars, logs, etc.) Material participation is a year by year determination. Rentals are generally not time intensive.

MATERIAL PARTICIPATION IN THE RENTALS

Who monitors the rentals? Who collects the rent? Who does the repairs?

Do you have a real estate agent or manager or employee responsible for any of the rentals? If there is paid management, it is a strong indicator taxpayer did not materially participate.

Is anyone besides you involving with managing or overseeing any the properties? Does a relative or friend manage/monitor the property for free?

Does a tenant receives free/reduced rent for managing the rentals - or for caring for the properties?

If you do not qualify as a real estate professional you may still be able to use Form 8582 to determine what amount of your Modified Adjusted Gross Income is subject to the phase-out limitations for the rental losses.

Customer: replied 6 years ago.
Material Participation in the rentals. I monitors the rentals and collect the rent and make repairs. The commercial rental property is to a business corporation, which I also owns. Therefore I wear two hats (Landlord & tenant). Can I take the loss $18k? Form 8582
Customer: replied 6 years ago.
No. I do not work full-time or part-time as a real estate professional.

Yes I do own the property its debt financed.

Yes I do materially participates more than 750 hours for 2007.

For 2007 I spent numerious hours leasehold improvement management with contractors and government inspectors, permits, licenses, etc.
(Documentation is not logged)

I monitor the rental and collect the rent and execute the repairs needed.

There is no one else managing this property, but me.

No the tenant does not receive reduce rent. Fair market value.

The tenant is a Corporation, which I also own and is my main source of income.

I do not understand Form 8582. Can I get more information.
Expert:  MDP replied 6 years ago.
Customer

If you spend more than 50% of your time managing this rental property (If the taxpayer has a full-time job working 2080 hours a year in a non-real property business, he must work 2081 on his real property businesses to meet half-personal services test! In other words over 50%) and have materially participated more than 750 hours for 2007 in managing the property then your losses are deductible on your individual tax return.

Customer: replied 6 years ago.
No I do not work 2081 on this real property. I guess I will carry this loss of $18k and probably roll forward losses for many years to come. Is there any method in the future to take this loss against my ordinary income?
Expert:  jgordosea replied 6 years ago.

Greetings,

You said: The commercial rental property is to a business corporation, which I also owns.

According to the Internal Revenue Service audit guide for passive activities at http://www.irs.gov/businesses/small/article/0,,id=146326,00.html :

There are six exceptions to the definition of rental. Under Reg. § 1.469-1T(e)(3)(ii), six types of activities normally defined as rentals, are treated as non-rental activities, i.e. as businesses, in most cases. As a result, the active participation standard and the $25,000 allowance do not apply. If the activity falls outside the rental definition, it is passive or non-passive based on whether the taxpayer materially participates. Following are the six exceptions:

  1. The average period of customer use is 7 days or less. For example: condo rentals, short-term use of hotel/motel rooms, and businesses that rent videos/tuxedos/cars/tools, etc.
  2. The average period of customer use is 30 days or less and significant personal services are provided with the rental. Examples: hotels and motels.
  3. Extraordinary personal services are provided with the rental. Examples: hospitals, nursing homes and boarding schools.
  4. The rental is incidental to a non-rental activity.
  5. The taxpayer customarily makes the rental property available during defined business hours for nonexclusive use by various customers. Example: golf courses, health clubs and spas.
  6. The taxpayer provides the property for use in a non-rental activity of his own partnership, S Corporation, or joint venture. The key word here is "provides," not "rents." For example: a partner contributes property in exchange for an ownership interest. This non-leasing transaction with the partnership is not a rental. Reg. § 1.469-1T(e)(3)(vii) states: "Thus, if a partner contributes the use of property to a partnership, none of the partner's distributive share of partnership income is income from a rental activity..."

It is not conducive, in this forum, for us to attempt to exchange enough information to determine if your statement that the property you reported as a rental is used in a business that you own can definitely meet the exception in number 6 to the definition of activities normally defined as rentals.

Nonetheless, you may be well served to discuss this possibility with your current representative and your tax preparer ( or even if you have to find another experienced tax practitioner for this purpose) to determine if you were providing the property to your business rather than it being a rental. Factors in the consideration will include, but are not limited to, the structure and ownership of your business, prior reporting of the activity from the property and the type of entity involved. It is possible that the rental could be considered part of the business (when all the facts and circumstances are considered) so that the losses on the property could be included in the net profit or loss of the business without you having to qualify as a real estate professional.

Even if in the past you have not been providing the property to your business rather than it being a rental that may be a possible arrangement in the future, again, depending on your particular situation.

I hope this general information on activities normally defined as rentals,but are treated as non-rental activities, does help.

Best regards.

 

jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3095
Experience: I've prepared all types of taxes since 1987.
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jgordosea
jgordosea
Enrolled Agent
2840 Satisfied Customers
I've prepared all types of taxes since 1987.