Schedule E, form 8582, etc

[Sparky]

Thus far I have been investing in Real Estate funds passively via PE and have been happy with the returns. But given my spouse and I are still full time physicians, we do not have any personally actively managed properties nor meet the status of Qualified Real Estate professional to harvest the full extent of the passive depreciation losses on our return- losses now approximating 1.5M to date.

We are in the position where 1) one of us could retire 2) invest in some new personally held real estate rental property and put in the hours to qualify for this special RE professional status.

My question is does the benefit of depreciation harvesting either in standard or accelerated fashion only apply for the properties are personally owned and managed or also the 1.5M carried forward passive losses from prior years. I would really like to use these current losses to offset my future W2 earnings and other sources of investment income

[The White Coat Investor]

I'm no accountant, but if you qualify to use them you qualify to use them. The IRS doesn't ask what year they come from as far as I know.

[DavidGlennCPA]

This is going to get technical. The answer to your question is actually very complicated.

All being a RE pro does is remove the treatment of rental real estate being per se passive. You still need to meet one of the seven participation requirements of §1.469-5T just like with any other business.

Participation is determined on an activity by activity basis. Absent an election, each interest in real estate is treated like a separate activity. There's a special election just for RE pros that allows them to elect to treat ALL of their interests in real estate as a single activity.

This has the effect of making activities that would otherwise be passive (because one of the seven tests under §1.469-5T isn't met) to become non-passive.

§1.469-9(f) states that if a RE pro elects to treat all interests in real estate as a single interest, and at least one of those interests is held as a limited partner (your PE real estate funds are held as a limited partner), then all of your interests in real estate are treated as a limited partner interest.

As a deemed limited partner in all of your real estate interests, you now only have three tests under §1.469-5T that you can meet to materially participate instead of seven.

Of the three tests, only the 500 hour rule would apply to your situation.

This means that as a RE pro, you need to spend at least 500 hours on your rental real estate activities in order for them to be non-passive.

Just qualifying as a RE pro doesn't mean that you have spent 500 hours on your rental. If one works as a RE agent then that can count towards RE pro status but not towards the 500 hours of participation in your rental real estate activity, for example.

The effect of your interests in rental real estate becoming non-passive is as follows -

• Future losses are deductible against your other income
• Previously suspended losses can be used to offset income generated by the activity

It does not allow you to suddenly deduct the previously suspended losses in the year the activity becomes non-passive.

The downside of all of this is that if you have previously suspended passive losses and you've made the election to group your activities, selling one of the activities with suspended losses does NOT free up the loss. This is because you haven't disposed of the entire activity.

If you don't make the election and you sell one of the activities, the losses are deductible in the year of the sale.

[ENT Doc]

That’s a heck of a lot of losses. Serious question. Do you have that level of income to offset because otherwise aren’t the excess losses lost in that year of sale?