Message Font: Serif | Sans-Serif
 
No. of Recommendations: 0
Regarding the passive versus active income, Phil followed up with a question upon which I would really like an answer, if you know.

Here is Phil's question: "But back to OP's question. Clearly, if she uses the management company to do everything, she's not actively participating. But how about her other scenario; is that active enough? I've never been clear on this."

My question was.....if I get a management company to only screen tenants and collect the rents, while I actively manage the property otherwise, would it be active or passive income? I have my own vendors whom I prefer. When I rented the house previously, I could call whatever vendor and they appeared "johnny on the spot" in less than 12 hours to perform the repair, and I would either give them my credit card or immediately write them a check.

We hae some management companies here in Columbia, who add a markup to the repairman's invoice, pocketing the difference. I will not go for that, and I trust the people I have dealt with in the past. These are companies and individuals with whom my late parents also transacted business, and I value their reputations, service and quality of work.

Donna
Print the post Back To Top
No. of Recommendations: 0
Here is Phil's question: "But back to OP's question. Clearly, if she uses the management company to do everything, she's not actively participating. But how about her other scenario; is that active enough? I've never been clear on this."

Well, I tried to dodge it.

I'm a tad rusty on the particular details of how many hours you need to put into the rental to make it qualify for the $25k rental loss allowance. So let's start by finding out of the question is important before we try to answer it.

Is the rental going to produce a loss for tax purposes? Do you have any other rentals that produce income?

--Peter
Print the post Back To Top
No. of Recommendations: 2
Regarding the passive versus active income, Phil followed up with a question upon which I would really like an answer, if you know.

Here is Phil's question: "But back to OP's question. Clearly, if she uses the management company to do everything, she's not actively participating. But how about her other scenario; is that active enough? I've never been clear on this."

My question was.....if I get a management company to only screen tenants and collect the rents, while I actively manage the property otherwise, would it be active or passive income?


Here's the relevant text from IRS Pub. 527:

Active participation. You actively participated in a rental real estate activity if you (and your spouse) owned at least 10% of the rental property and you made management decisions or arranged for others to provide services (such as repairs) in a significant and bona fide sense. Management decisions that may count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and other similar decisions.

There are two somewhat conflicting sentences found in the IRS Audit Technique Guide for Passive Activity Losses (2005) regarding active participation in real estate rentals: "However, the taxpayer must be exercising independent judgment and not simply ratifying decisions made by a manager." (page 2-2) "To be actively participating, the taxpayer must be making management decisions in a bona fide sense, not merely ratifying an on-site manager's decisions." (page 2-17)

All of the above leads me to believe that the active vs. passive participation determination is a "facts and circumstances" decision. My personal inclination would be to claim active participation if you make the final decision to accept/reject a pre-screened tenant (on the basis that your management company isn't an on-site manager). If the management company makes the accept/reject decision I might want to do further research into relevant tsx court decisions before claiming active participation.

Ira
Print the post Back To Top
No. of Recommendations: 0
More than likely, the first couple of years, the rental will produce a loss, due to depreciation. The rental will be placed on the market sometime this month, and then I have to rehab it for the tenant. So, there will be additional expenses.

In addition, I have to replace the roof, but that is a capital expenditure.

Donna
Print the post Back To Top
No. of Recommendations: 0
I will be approving the tenant. The management company will be soliciting tenants and I will review their applications, etc. The management company will collect the rents and remit my share; but I will be responsible for calling the repair persons/companies and responsible for seeing that the work is performed correctly and in a very timely manner.

Donna
Print the post Back To Top
No. of Recommendations: 1
In addition, I have to replace the roof, but that is a capital expenditure.

Not so fast. The IRS has lost in Tax Court on that issue. (Oberman v. CIR, 47 TC 471 (1967)) If the replacement roof restores the roof's function but does not significantly change the function or extend the life of the structure (that is, the entire unit, not the roof) it is a repair, and not a capital improvement.

The IRS has proposed a new reg 1.263(a)-3 which clarifies some of these distinctions in light of the various Tax Court decisions, but I don't think it has been formally adopted as yet.

Ira
Print the post Back To Top