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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22707
Experience:  Taxes, Immigration, Labor Relations
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For the state of california I am a real estate professional.

Customer Question

For the state of california I am a real estate professional. My MAGI is $200K are my rental losses deductible if full like they are for the IRS which there is no limit if you are a real estate professional. If they are not can you give me the tax code and publication that states they are not please.

Thank you
Submitted: 3 years ago.
Category: Tax
Expert:  Lev replied 3 years ago.

LEV :

Hi and welcome to Just Answer!

See for reference – IRS publication 925 - www.irs.gov/pub/irs-pdf/p925.pdf

There are two kinds of passive activities.

  • Trade or business activities in which you do not materially participate during the year.
  • Rental activities, even if you do materially participate in them, unless you are a real estate professional.

Special $25,000 allowance. If you or your spouse actively participated in a passive rental real estate activity, you can deduct up to $25,000 of loss from the activity from your nonpassive income. This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities. Similarly, you can offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception.
Phaseout rule. The maximum special allowance of $25,000 ($12,500 for married individuals filing separate returns and living apart at all times during the year) is reduced by 50% of the amount of your modified adjusted gross income that is more than $100,000 ($50,000 if you are married filing separately). If your modified adjusted gross income is $150,000 or more ($75,000 or more if you are married filing separately), you generally cannot use the special allowance.

Qualifications. You qualified as a real estate professional for the year if you met both of the following requirements.

  • More than half of the personal services you performed in all trades or businesses during the tax year were performed in real property trades or businesses in which you materially participated.
  • You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated.

Do not count personal services you performed as an employee in real property trades or businesses unless you were a 5% owner of your employer. You were a 5% owner if you owned (or are considered to have owned) more than 5% of your employer's outstanding stock, outstanding voting stock, or capital or profits interest.

If you qualified as a real estate professional for 2010, report income or losses from rental real estate activities in which you materially participated as nonpassive income or losses, and complete line 43 of Schedule E (Form 1040).

Customer :

I am aware of this for the IRS. My question is does this also apply to the State of California as far as do they conform to the IRS rules for real estate professional? If so can you provide me with the information that states it does.

LEV :

California conforms to most provisions of the federal tax law.
California’s conformity date to the Internal Revenue Code is January 1, 2009, for taxable years beginning on or after January 1, 2010.
See for reference - http://www.ftb.ca.gov/forms/updates/conformity.shtml .
All provisioning related to real estate professionals are in effect for California state income tax determinations.

Customer :

So if I am understanding your response you are saying in 2008 which is where I have the issue is that California did not conform to the IRS rules for Real estate professionals therefore my rental deductions for that year would not be dedcutible because my MAGI was at $200K, but starting in 2009 it would be deductible?

LEV :

To answer your question in connection to 2008 tax laws - we need to know (1) when federal tax rules about Real estate professionals was adopted and (2) what was California’s conformity date in 2008.
That will take some time to research.
The answer provided is related to 2010 tax law as mentioned above.

Customer :

No problem I will need to know that informaition for that year. If you could research that for me and let me know I would appreciate it.

Expert:  Lev replied 3 years ago.
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Expert:  Lev replied 3 years ago.

Please see this publication that list differences between CA and federal tax laws in effect for 2008 - http://www.ftb.ca.gov/forms/2008/08_1001.pdf - see page 8

Beginning with the 1994 tax year and for federal purposes only, rental real estate activities conducted by persons in a real property business are not automatically treated as passive activities. California did not conform to this provision and these activities are still considered passive under California law.
So that provisions for federal tax purposes was in effect from 1994 and was not conformed by CA in 2008.

According to this publication - on CA tax return you should do following:

To figure the adjustment to make on Schedule CA (540 or 540NR), line 17, use form FTB 3801, Passive Activity Loss Limitations, and include these activities when completing the California Passive Activity Worksheet and the California Adjustment Worksheets in the instructions for form FTB 3801.

 

I also verified the same publication for 2010 and it contains the same provision despite California's conformity date was changed - http://www.ftb.ca.gov/forms/2010/10_1001.pdf

So please be advised that mentioned difference is still in effect. Sorry for confusion.

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