Is there a COVID-19 exception for this real estate deduction?

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Q. We own two small rental properties that I maintain. In the past, I met the “material participation” IRS requirement of 500 hours per year of time devoted to real property. This year, because of COVID-19, it will be tougher to meet the 500 hours — unless there is a lot of snow to remove or I just waste time at the properties. Is there any IRS adjustment because of the pandemic?
— Landlord

A. To date, there has been no change as far as the requirements for material participation in rental real estate activities due to the pandemic.

But hang on. Let’s go over this rule a bit further.

The rule you’re discussing is a helpful one for some property owners.

It’s a general rule that if you devote more than 500 hours, you are considered to have “materially participated,” allowing for losses from the activity to be claimed without having income from other activities to offset any losses against.

However, for rental real estate there is another test that needs to be met, said Neil Becourtney, a certified public accountant and tax partner with CohnReznick in Holmdel: qualifying as a real estate professional.

“To be considered a real estate professional, you must perform more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated, and that time devoted to real property endeavors must exceed more than half your total hours devoted to all trades or businesses,” he said. “You should keep records supporting the time you devoted to the rental properties in order to provide support to the IRS in the event of an audit.”

If your adjusted gross income (AGI) is below $100,000, a special provision in the tax code allows you to claim up to $25,000 of rental real estate losses with a much lower threshold of actual activity that must be performed, he said. This deduction is phased out $1 for every $2 that AGI exceeds $100,000 until it reaches $150,000, at which point the deduction is fully phased out.

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This story was originally published on Oct. 9, 2020.

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