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Article Date:
October 2006

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Four Major Rental Property Questions Answered: (1) Deducting Rental Losses, (2) Grouping Properties, (3) Tracking Rental Property Time, and (4) Material Participation

1. Deducting Rental Losses


I am a real estate agent and my wife is a dentist. If I buy a rental property, can the rental losses offset our taxable income? (G.P. North Port, FL)


Yes! But you need to pay attention, know the rules, and keep some time records.


The paying attention part involves knowing two separate sets of rules that apply to your situation. The first set, in test 1 below, requires you to meet two time-test requirements to achieve classification as a real estate professional. The second set, in test 2 below, requires a tax-law defined material participation as a separate condition for deducting your losses. And then, just to make sure you are paying attention, the law intertwines the material participation requirement into test 1.


Don’t worry. We clarify all this in the two tests below:


Test 1: Classification as a Real Estate Professional


Step 1. Keep track of your time.


Step 2. Make sure that the combined time you spend on personal services in your real estate agent and rental property activity is more than half the time you spend on all activities in which you materially participate (explained in test 2).1


Example. Just for this example, let’s say that you are a real estate agent, have a W-2 job, and own one rental property. Your time spent on personal services in these three capacities is:



1,900 hours as a real estate agent


105 hours on the rental property


1,200 hours on the W-2 job (not related to real estate)

Your total time worked is 3,205 hours. Of that, 2,005 (1,900 plus 105) hours are in the real property ... Log in to view full article.

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