For preparers who file Schedule E for rental real estate — the passive-per-se treatment under §469, the exceptions that let a loss deduct against other income, and the substantiation each exception requires.
Rental real estate is passive per se under IRC §469 regardless of how much the owner participates. That is the starting point. The exceptions determine whether a loss is deductible against non-passive income in the current year, suspended and carried forward, or freed on disposition. Active participation in a rental activity opens the $25,000 special allowance under §469(i), subject to phase-out at higher modified adjusted gross income. Real estate professional status under §469(c)(7) removes the per-se passive treatment entirely, subject to substantive material participation tests. Both exceptions are heavily audited because the taxpayer typically has the incentive to claim them and the substantiation is entirely on the taxpayer to produce.
This course covers the §469 framework as applied to rental real estate. Coverage includes the definition of passive activity and the passive-per-se rule for rentals, the seven material participation tests under Treas. Reg. §1.469-5T, the $25,000 special allowance under §469(i) and its MAGI phase-out, the real estate professional exception under §469(c)(7) and the substantive participation the exception requires, grouping rules for aggregation of activities, and the treatment of suspended passive losses upon disposition of the activity.
The course closes with the recordkeeping practices required to support material participation, active participation, or real estate professional claims under IRS review, including the time logs and contemporaneous documentation the taxpayer must maintain. Two hours of Federal Tax credit.
By the end of this course, participants will be able to:
Definition of passive activity, the passive-per-se rule for rental real estate, and the exceptions that produce different treatment of losses.
The seven tests, their application in practice, and the substantiation each test requires.
Active participation standard, the MAGI phase-out schedule, and interaction with other rental activities.
The 750-hour requirement, the more-than-half-of-personal-services requirement, and the substantive material participation test that must still be satisfied for each rental activity.
Aggregation rules under Treas. Reg. §1.469-4, the real estate professional's election to treat all rental real estate as one activity, and the disclosure requirements for grouping decisions.
Treatment of suspended passive losses upon disposition of the activity, the effect of partial dispositions, and the ordering rules when multiple activities have suspended losses.
Time logs, contemporaneous records, and the substantiation practices that support material participation, active participation, or real estate professional status under IRS review.
Jennifer Harris Smith, JD, CPA. Attorney (Texas). CPA (Texas). Member of Texas Bar College. Full bio →