Rental real estate activities performed by a real estate professional are not considered passive and therefore related losses cannot be used to offset passive gross income. For a taxpayer to be considered a real estate professional both of the following tests must be satisfied. First, more than 50 percent of all the personal services the taxpayer performed during the year in trades or businesses must have been performed in real property trades or businesses in which he or she materially participated. Real property trades or businesses are those that develop, construct, acquire, convert, operate, manage, or broker real property. Second, the taxpayer must have performed more than 750 hours of personal services during the year in such real estate trades or businesses. For purposes of these tests personal services performed by the taxpayer’s spouse does not count nor are services rendered by the taxpayer as an employee in real estate trades or businesses unless the taxpayer owns more than 5 percent of the employer.
In this context, real estate professionals have the option of making an election between treating each real estate activity as a separate activity or to treat each activity as a single one. The advantage of grouping one or more activity is that taxpayers will have an easier time meeting ownership and participation standards. On the other hand, the taxpayer may not be able to deduct suspended losses when one of the grouped activities is disposed of. Whichever way the taxpayers decided is binding for the taxable year of the election and for all future years that the taxpayer qualifies as a real estate professional unless there is a material change in the nature of the activity. To make the election the taxpayer must attach a statement of declaration to the original income tax return for the year he or she qualifies as a real estate professional.