How a Real Estate Investor Turned Paper Losses Into Real Tax Savings
Case Study Summary
A real estate investor with multiple properties was generating significant depreciation deductions — but under the passive loss rules, those losses were stuck on his tax return, unable to offset his other income. A grouping election changed everything.
The Passive Loss Problem
Rental real estate losses are generally treated as passive losses under the tax code. Passive losses can only offset passive income — not wages, self-employment income, or other active sources. For investors who earn primarily active income, rental deductions can pile up on their returns for years without providing any current benefit.
The Real Estate Professional Exception
Taxpayers who qualify as real estate professionals under the tax code can treat their rental activities as non-passive. This allows rental losses to offset any type of income, including wages and business income. Qualifying requires meeting strict time and participation tests — but for the right investor, the tax savings can be substantial.
Grouping Elections as a Tool
When a taxpayer owns multiple rental properties, grouping elections allow those properties to be treated as a single activity for purposes of the material participation test. This can make it significantly easier to meet the thresholds required for the real estate professional exception — and unlock the deductions that have been waiting.
Who This Strategy Is Best For
- ✓Real estate investors with multiple rental properties
- ✓Business owners who also hold real estate
- ✓Taxpayers with suspended passive losses from prior years
- ✓Individuals considering real estate professional status
- ✓Investors whose rental activities generate significant depreciation
Explore Your Strategy
Speak directly with Rajiv Rebello to see how this strategy fits into your comprehensive tax plan.