A SUCCESSFUL RENTAL PORTFOLIO IS NOT AUTOMATICALLY AN AUDIT TARGET.
WHEN A PAPER LOSS NEEDS SUPPORT
Real estate is one of the few investments that can produce positive cash flow while reporting a taxable loss. Depreciation, cost segregation, and bonus depreciation may all contribute to that result. These are legitimate tax strategies when applied correctly and supported by appropriate records. When you use rental real estate losses against other income, questions may arise about the passive activity loss rules, material participation, and real estate professional status. Real estate professional status is not simply a box to check. Generally, you must spend more than 750 hours during the year qualifying real property trades or businesses in which you materially participate. Those hours must also represent more than half of the personal services you perform across all trades or businesses. This is where documentation becomes essential. A calendar or activity log maintained throughout the year creates a much stronger defense than hours reconstructed after an examination notice arrives. By then, you may remember the large renovations and major leasing decisions but forget about the numerous smaller activities that made up the year.
REAL ESTATE PROFESSIONAL STATUS IS NOT SIMPLY A BOX TO CHECK.
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