How do I qualify as real estate professional?

750+ hours + >50% personal services + active participation.

Suspended losses transferable to spouse?

Yes \u2014 by gifting interest in property.

Active vs material participation?

Active: lower bar. Material: 500+ hrs. Both differ from PAL passive.

Trader status vs investor?

Trader (frequent + short-term + business intent) escapes PAL.

AGI threshold inflation-adjusted?

No \u2014 $100K/$150K not indexed since 1986.

Passive Activity Loss (PAL)

PAL: rental real estate losses capped to $25K MAX if active + AGI <$100K. Real estate professional: no limit. Carries until sale.

Rental Property Loss ($)

Total AGI excluding rental ($)

Active Participation?

Real Estate Professional?

Allowed Now

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Carryover

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Tax Savings

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Rental loss	—
AGI	—
Active participation	—
RE Professional	—
Allowed this year	—
Suspended/carryover	—
Tax savings	—

Passive Activity Loss (PAL) rules (IRC 469) limit rental property losses against other income. Standard: limited to passive income. Active participant exception: $25K loss against ordinary income if AGI under $100K (phased out by $150K). Real estate professionals: no limit.

Active Participation Exception

Up to $25,000 in rental losses deductible against ordinary income if: you make management decisions (approve tenants, rents, repairs) AND your AGI is below $100,000. Phases out $2 per $1 above $100K, fully phased out at $150K.

Real Estate Professional Status

Two tests: (1) >50% of personal services in real estate trades, (2) 750+ hours in real estate activities. If you qualify, rental income/loss is NOT passive — fully deductible against other income. Best for full-time investors, brokers, property managers.

Suspended Losses

Losses you can't use due to passive limitation accumulate as 'suspended losses'. When you sell the property in a fully taxable disposition, ALL suspended losses become deductible against other income at that point. Major tax benefit on exit.

Last updated May 2026. Sources: IRS Pub 925.