Individuals’ active participation Rental Real Estate

Individuals’ active participation rental  real estate losses up to $25,000 may be used against nonpassive income.

A natural person who (1) has at least a 10% interest in any rental  real estate activity and (2) otherwise “actively participates” in that activity, may offset up to $25,000 of nonpassive income with that portion of the passive activity  loss, or of the deduction equivalent of the passive activity  credit, attributable to that activity . (Code Sec. 469(i)(1). Keep in mind all rental activities are treated as passive activities. The  active participation criteria is a less stringent standard than material participation. For example, you may be treated as actively participating if you make management decisions in a significant and bona fide sense. Management decisions that count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions.

For a married person filing a separate return, the allowance is $12,500 if he lives apart from his spouse at all times during the tax year, and zero if he does not live apart from his spouse at all times during the tax year. The $25,000 allowance ($12,500 for marrieds filing separately) is reduced (but not below zero) by 50% of the amount by which taxpayer’s adjusted gross income (AGI) as specially computed exceeds (1) $100,000 ($50,000 for marrieds filing separately), or (2) $200,000 ($100,000 for marrieds filing separately). Report income and expenses  from these properties on Line 40 of Schedule E.