Tax Guide |
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Like any business-related activity, you subtract your deductible expenses from your gross income to determine your net income or loss from the activity.
This net income or loss may be included in total net investment income for purposes of computing the 3.8 percent tax on net investment income applied to high-income taxpayers. In general, net investment income includes net income from interest, dividends, annuities, royalties and rents, unless the income is derived in the ordinary course of a trade or business that is not passive.
The net investment income tax rules generally adopt the same rules that are used for passive activity losses. Therefore, a rental activity is not necessarily a trade or business. It depends on a number of factors, including the type of property, the number of properties rented, the day-to-day involvement of the owner or agent, and the type of rental. In general, rental activity of real estate or equipment is considered passive with some exceptions, such as rentals of equipment that last seven days or less. In addition, the rental activity of a real estate professional is not treated as a passive activity under the passive activity rules. But, just because you may qualify under a passive activity rental exception does not mean that the rental business qualifies for the trade or business exception for computing the net investment income tax.
If you have a rental real estate loss, the amount of loss you can deduct may be limited. The IRS is ever vigilant against the possibility that you are merely trying to create a tax shelter for other types of income. Therefore, there are some special rules that may prevent you from deducting some (or all) of your real estate losses:
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