Magazine article The CPA Journal

Real Estate after RRA '93

Magazine article The CPA Journal

Real Estate after RRA '93

Article excerpt

The rules relating to real estate have been liberalized for tax years beginning after 1993 as a result of RRA '93.

Since 1987, rental real estate has, by definition, been a passive activity regardless of the taxpayer's level of participation. Expenses from passive activities may be deducted only to the extent of income from passive activities. Any excess deductions are suspended for use against future passive income or until a disposition of the activity generating the deductions. In an effort to equate individuals truly active in real estate with individuals active in other kinds of businesses, a new set of rules has been introduced. Losses generated by "real property trades or businesses" are no longer automatically passive activity losses.

For purposes of the new rules, a real property trade or business includes any real property development, redevelopment, construction, reconstruction, operation, conversion, acquisition, rental, management, leasing, or brokerage activity.

Individuals who materially participate in their rental real estate activities may now use losses generated by the activities to offset income from nonpassive activities, such as interest and wages. In order to be eligible for the new provisions, the taxpayer must satisfy all of the following:

1. More than 50% of an individual's personal services during the tax year must be performed in real property trades or businesses. Personal services of an employee are not to be considered as performed in a real property trade or business unless the employee is a five percent owner. A non-owner employee spending 100% of his time in real estate--60% as an employee, 40% management of outrightly owned properties--would not benefit from the new rules. Also, the individual must perform more than 750 hours of service per year in the real property trades or businesses in which the individual materially participates. …

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