Rental activities are considered passive by definition and are subject to passive activity loss rules, however activities of real estate professionals are treated as nonpassive activities.
The taxpayer qualifies to be designated as a real estate professional if both of the following conditions are met:
- More than half of the personal services the taxpayer performed in all trades or businesses during the year were performed in real property trades or businesses in which the taxpayer materially participated, and
- The taxpayer performed more than 750 hours of services during the tax year in real property trades or businesses in which the taxpayer materially participated.
To designate the taxpayer as a real estate professional for rental property, from the Main Menu of the tax return (Form 1040) select:
- Income
- Rents, Royalties, Entities (Sch E, K-1, 4835, 8582)
- Rents and Royalties - Select the property from the list.
- Supplemental Income Questions
- Disposed of Property or Eligible Real Estate Professional - Change to Yes.
To designate the taxpayer as a real estate professional for rental real estate activity reported in Box 2 of Schedule K-1 from a partnership or S corporation, from the Main Menu of the tax return (Form 1040) select:
- Income
- Rents, Royalties, Entities (Sch E, K-1, 4835, 8582)
- K-1 Input - Select the K-1 from the list.
- Net Income/Loss for Rental Real Estate Activities - Enter the amount in the field "Material Participation Income/Loss". (If this field is inaccessible because an amount is entered in one of the other two fields, delete the other amount, select Ok, then again select Box 2.)
Additional Information:
IRS: Publication 527, Residential Rental Property
IRS: Publication 925, Passive Activity & At-Risk Rules
IRS: Instructions for Form 8582, Passive Activity Loss Limitations