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Author: Wradical Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121177  
Subject: Re: Any Downside to being a real estate professi Date: 5/13/2008 10:25 PM
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SirTas, sorry I haven't responded sooner, but had a busy weekend.

"In the second paragraph, you mention making an election. I suppose this election is really just the single question on the back of a Schedule E. (Yes?) And that "election" is something that can change from year to year ...

I thought that one of the big differences that that election/question makes is that any losses needn't be capped at $25k.


Well, that's part of it. But more fundamentally, if you're a "qualified taxpayer", a/k/a an "electing real estate professional", then losses from rental activities aren't passive at all; therefore, you never get to the $25K limit, which is phased out between $100-$150K of other income.

Are you now talking about that question on the back of Schedule E?
Yes, as to claiming the status of a real estate professional - but there's more to it - see below.

As for adding up the pluses and minuses from all the properties, this is ALWAYS done, isn't it?

Yes. But then, if you have a net loss, how much can be used may depend how your activities are classified.

Generally, each business "undertaking" - each rental property, each S Corporation, each partnership, is a separate activity - unless you elect to group them differently. Most, if not all, tax prep programs make each additional such entity that you enter a new activity, and number them separately. But you can change that. And there are exceptions. For example, if you have an active business (nonpassive), and you rent real estate to the business, that rental income is not passive. So you might combine the two into one activity.

On the other hand, you might have a single investment partnership that reports multiple activities (on a supplemental schedule attached to the K-1).

(When you speak of aggregating, do you mean adding the pluses and minuses together?)

No, you do that anyway, as you mentioned. I mean treating multiple business activities as a single activity. The usual reason you do that is because you "materially participate" in the combined opertions, but might be hard-pressed to make that case for each one separately.


What's Form 8582?

The form where you report passive income and losses. The form itself is a summary. If your situation is at all involved, there will be supporting schedules showing what the passive activities are, the net result, and any net disallowed losses, and if so, how much loss from each activity is allowed, and how much disallowed and carried over.


What are PALs?
Passive Activity Losses; in common usage, it especially refers to NET passive activity losses, or PALs, that are disallowed and carried over to later years - and, ultimately, until the activity is disposed of in a taxable transaction.


This stuff easily can fill a one-or-two-day seminar.
For some fairly simple reading, IRS discusses it pretty simply in:
* Pub. 527, Residential Rental Property.
* Pub. 925, Passive Activity and At-Risk Rules.


Bill
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