This has now changed. Qualifying as a real estate professional will now benefit many landlords who earn profits from their rentals because, by doing so, they won’t have to pay the Net Investment Income tax (NII tax) on them. The Net Investment Income tax, enacted to help fund Obamacare, took effect on Jan. 1, 2013.
Is all rental property passive income?
As explained above, income from rental properties is almost always considered passive income, but there are a few exceptions. In the below scenarios, the IRS might consider income from a rental property active instead of passive. If the owner of the rental property is classified as a real estate professional.
Is the sale of a rental property passive income?
Although rental income is passive income, the sale of any real estate (including rental property) results in a capital gain or capital loss not passive income.
What are the tax rules for real estate professionals?
If a taxpayer qualifies as a real estate professional, however, the passive activity loss rules do not apply and losses from rental real estate activities are deductible against nonpassive income such as wages or Schedule C income (Secs. 469 (a), (c) (2), and (c) (7)).
Is there an exception for real estate professionals?
Recently issued regulations provide a safe-harbor exception to this new net investment income tax for certain real estate professionals.
Is the rental property of a real estate professional passive?
A rental real estate activity of a taxpayer who qualifies as a real estate professional is not per se passive, but the taxpayer must still materially participate in the activity for it to be treated as nonpassive.
What makes a real estate professional under the IRC?
Within this definition are terms and concepts that also need to be defined to understand one’s status as a “real estate professional” under the IRC:
