professional, each of your rental real estate interests is treated as a separate activity—that is, as a separate business—unless you make an election to treat all those interests as a single activity by making the real estate professional election on your tax return. Because of this rule, if you have multiple rental properties and you don’t make the election, you must establish material participation for each property separately, and must satisfy the more-than-fifty-percent test and the 750-hours test for each property separately in order to qualify as a real estate professional with respect to that property—and qualifying for one property wouldn’t mean you qualify for any other property. Thus, if you don’t make the election, qualifying as a real estate professional for all your properties becomes more difficult (and may become impossible) as the number of properties increases. But if you do make the election, you only have to establish material participation, and satisfy the more-than-fifty-percent test and the 750-hours test, for the combined properties as a whole. These tests are applied annually. This means that you may qualify as a real estate professional in some years but not in other years. As a result, the same real estate activity may generate passive losses in some years and non-passive losses in other years.
real estate, here are some things you can learn from the Gragg case: 1. Although you may qualify to make the real estate professional election, first consult with your tax advisor to determine whether you should consider making this election on your tax return. Once made, the election is irrevocable unless permission is granted by the IRS, and your individual situation may not give rise to a favorable outcome once the election is made. For instance, if you have passive loss carryovers, they could be trapped until you dispose of all your rental real estate activities—clearly not a favorable result. 2. Even if you are a real estate professional and have made the real estate professional election, you must still clear the hurdle of material participation in your rental real estate activities for each year. 3. Make sure you are keeping a contemporaneous log of your time spent on those activities. The IRS and courts will be much more likely to accept these records than those that are constructed after-the-fact. •
Richard Hart, EA, CAA is an attorney with Hart & Associates, and has written many articles for the National Association of Residential Property Managers® (NARPM) publication, Residential Resource. Members of NARPM® receive information like this article every month through its news magazine, Residential Resource. Reprinted with permission. To join NARPM or to learn more, visit NARPM.org/join.
SUMMARY If you are a real estate professional and own rental
58 | think realty magazine :: may 2020
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