San Francisco Real Estate Professionals And The IRS

When it comes to defining a Real Estate Professional for tax purposes - which comes in handy if you are a high income earner and have passive losses on rental property - the IRS essentially says that you need to have an active role in managing the property, and spend at least 750 hours a year in doing so (That's about 1/3 of your 40 hour work week). Then your losses are not 'passive', and there is no limit to the detectability. Otherwise, your cap is $25k per year. Oh, but if your income is over a certain limit, you lose the write-off...

...still with me? One more step, and its key. If you cannot deduct losses based on income being too high, you can defer these losses until the sale of the property, and reduce your gain by the exact amount of losses racked up over the years.

In San Francisco, and California in general, this is a big deal. Incomes here are on the high end, and rental losses are as well, as the rental cost vs ownership costs for property are at a historical gap. Gaining access to the 'Real Estate Professional' treatment has potentially significant implications.

According to the Kiplinger Tax Letter a recent IRS ruling has clarified a deeper-level detail of this test, which helps tax payers gain the 'Real Estate Professional' status. It allowed a couple to have extra time to elect to treat multiple properties as a single entity, thereby working around the time test for each property individually.

More info on the IRS Real Estate Professional test can be found here. Please also consult with your tax planner if you think you need to navigate this test or have any landlord or passive loss issues related to real estate.