Prior to the enactment in 1986 of the passive activity loss rules, many doctors and other high-income individuals would invest in tax shelters that generated tax losses, which could be used to offset their other income. The passive activity loss rules prevent taxpayers from deducting their losses from certain “passive” activities against that taxpayer’s active income (such as wages) or portfolio income (such as interest and dividends). Real estate rental activities were once treated as per se passive, but an outcry from the real estate industry caused Congress in 1993 to allow certain “real estate professionals” to deduct their real estate tax losses against their interest, dividends, and other income.
Since 2014, real estate professionals have further benefited from their special tax status by not being subject to the 3.8 percent Medicare tax on some of their real estate rental income and capital gains. This article discusses recent guidance from the Internal Revenue Service (IRS) as to who qualifies as a real estate professional.
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