Today’s tax law puts your income and deductions into three separate buckets for tax purposes. Each bucket has its own rules and regulations. These are the three buckets:

Passive

Portfolio

Active

A real estate rental is automatically in the passive bucket if you do not qualify as a real estate professional.

If your real estate rental is in the passive bucket, the bucket has a lid on it that limits rental property loss deductions against anything other than passive income. This is a bad bucket.

For your rental property to escape the passive loss bucket, you need to both

qualify as a real estate professional, and

materially participate in the rental property.

The two tests were the subject of the recently decided Agarwal case.1 If you own or expect to ... Log in to view full article.