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<<I know the rules are very complicated because I have been reading them - and I am comfused!! I have tried to contact my accountant but that is virtually impossible at this time of year. Anyway, I want to try and make sure that I handle the partnership loss appropriately. I am pretty sure that the two rental houses are considered passive activity and have coded them as such. >>

I would respectfully disagree. If your husband is a qualified real estate professional (and it sounds like he is), then the rental property is no longer a passive loss. And all bets are off regarding the $25k special exclusion for rental real estate losses. Your losses can then be unlimited.

<<However, if my husband is 1/3 partner in this property and as such performs leasing functions, negotiations with buyers and sellers, management services, etc. for this property than wouldn't this qualify as "not passive activity"?>>

Very likely yes. But not necessarily for the reasons that you describe...but because he qualifies as a real estate professional.

<< I believe that he meets the requirements of real estate professional as defined by the IRS. If I check "other passive exceptions" on the TurboTax form than I am allowed to deduct the full amount of the losses on this one property; the loss is not reduced due to our AGI being over $100,000.>>

Right...and if you find the same box to check for the rental properties, TurboTax will also pull the limitations off of those properties also.

<<It makes a HUGE difference in the bottom line and obviously I would like to take this route but want to make sure I understand what I am doing.>>

I can't confirm way or the other. But from the limited information that you have provided, it would appear to me that you would meet the test as a real estate professional, and the limitations would be remove from the partnership losses and the rental losses. They are no longer passive activities, and therefore don't trigger the limitation.

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