Have a Tax Question? Ask a Tax Expert
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.
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.
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:
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.