The so-called passive activity loss (PAL) rules limit the write-offs that certain real estate investors are able to claim. Now, the same investors could get socked by the new 3.8% Medicare surtax on their net rental income.
Strategy: Be proactive. A real estate professional isn’t restricted by the PAL rules and their rental income generally isn’t subject to the new surtax.
Here’s the whole story: Generally, your annual write-off for passive activities is limited to your income from such passive activities. In other words, you can’t claim an overall passive loss. Any excess loss is “suspended” and carried over to the next year. The PAL rules were enacted to crack down on artificial losses sustained in tax shelter deals.
A “passive activity” is one in which you do not “materially participate.” The IRS has established several tests for establishing material participation. For example, you’re treated as a material participant ...(register to read more)