Active vs. Passive Status for Real Estate Activities: Material Participation Rules, Short-Term Rentals, Real Estate Professionals

IRC Section 469(c) defines a passive activity as any activity that involves the conduct of any trade or business in which the taxpayer does not materially participate. Real estate activities are, by default, passive. This classification limits a taxpayer's ability to deduct losses since passive losses can only absorb passive income. Passive losses accumulate until a taxpayer has passive income or the property is sold and the deduction is allowed. 

Investors often prefer to be classified as real estate professionals. This designation allows taxpayers to immediately offset passive income against ordinary income. Qualifications for real estate professionals are steep. They must spend more than one-half their time and more than 750 hours a year servicing the real estate trade or business. Additionally, they must pass a material participation test, separately for each property. These tests must be satisfied every year for the business to maintain REP status. An aggregation election is available that allows taxpayers to combine properties to meet the material participation test.

Short-term rentals have become more popular with the rise of rental services like Airbnb and Vrbo. Temp. Reg. Section 1.469-1T(e)(3)(ii) provides an exception to passive activity classification for qualifying tangible personal property used for seven days or less. This exception can provide planning opportunities for certain investors and their advisers.

Listen as our panel of federal tax experts clarifies the rules for active, passive, and material participation for real estate investors. 

I. Active vs. passive real estate investments: introduction

II. Active participation

III. Passive income

IV. Material participation

V. Short-term rentals

VI. Electing to aggregate rental activities

VII. Former passive losses

VIII. Recent developments

IX. Other considerations

A. 199A – Qualified Business Income deduction

B. Net investment income tax

X. Examples

The panel will cover these and other critical issues:

• The importance of real estate activity status in tax planning
• Differences in passive, active, and material participation
• How short-term rentals are classified for tax purposes
• The criteria for real estate professional status

Learning Objectives

After completing this course you will be able to:

• Identify investors who might benefit from an aggregation election
• Determine differences between passive, active, and material participation requirements
• Ascertain the criteria for real estate professionals
• Decide how short-term rentals are classified for tax purposes

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite:

  Three years+ business or public firm experience preparing complex tax forms and schedules, supervising other preparers or accountants. Specific knowledge and understanding of pass-through taxation, including taxation of partnerships, S corporations and their respective partners and shareholders.

  
  

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).