Passive Activity Losses - Uncle Fed's Tax*Board

Issue Identification
• Check to see if all Schedule E rental real estate losses have been
deducted as non-passive, possibly not considering the fact that the
taxpayer must materially participate in each rental activity.
• Look at the taxpayer’s occupation next to the signature block and
Schedule E line 43. To be a real estate professional, the taxpayer must
spend the majority of time [5] in real property businesses and/or rental real
estate.
• Review the Schedule E activities, Schedule K-1s for Form 1065 and Form
1120S returns, and W-2s for other indications regarding the nature of the
taxpayer’s activities.
Real Estate Professional
To be a real estate professional, an individual must spend the majority of his or
her time in real property businesses:
• Development or redevelopment
• Construction or reconstruction
• Acquisition or conversion
• Rental
• Management or operation
• Leasing
• Brokerage
The taxpayer must meet each of the following two time requirements:
• More than 50 percent of his/her time working in real property businesses;
AND,
• More than 750 hours of service during the year. [6]
One spouse alone must meet both tests. In addition, services performed as an
employee do not count unless the employee is at least a 5 percent owner.
Finally, before rental losses are deductible without being limited by the passive
losses rules, the taxpayer must materially participate in each rental. [7]
Examination Techniques:
• Determine whether the taxpayer materially participates in one or more of
the specific real estate trades or businesses listed above.
• Determine who is the real estate professional, husband or wife.
• Request and closely examine the taxpayer’s documentation regarding
time. The taxpayer is required under Reg. § 1.469-5T(f)(4) to provide
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