Rental Tax StrategiesHours, not a title we award

Publication 925 states the tests in plain, stern language. More than half of the personal services you perform in the year are performed in real property trades or businesses in which you materially participate. You perform more than 750 hours of services in those trades or businesses. Both tests are required. One without the other does not carry the status.

Material participation has its own tests. A spouse's hours can matter in the ways the publication describes. An investor hour spent reading reports is not the same as an hour managing the property. We will not rewrite the tests into a softer list that awards the status to anyone who owns a house.

We do not award the title. If you bring a log, we will read it against the tests and say what it shows and what it does not show. If you have no log, we will not backfill one from your memory of being busy.

Active participation is easier and worth less. It can allow up to 25,000 dollars of rental loss against nonpassive income, and it phases out as income rises. You can meet active participation and fail the professional tests. Owners who hear both phrases in one podcast treat them as the same badge. They are not.

The special allowance is why a moderate income owner with one or two houses sometimes sees the loss on the return, and a higher income owner with the same houses does not. The difference is the phaseout, not a moral judgment about who works harder. We say that so the higher income owner stops hunting for a title to fix a math rule.

If you are close to the line on hours, the honest work is a contemporaneous log for the year still open, not a reconstructed diary for a year already filed. Reconstruction is how these files get hurt.

Date, property or trade, what you did, and how long. Management decisions, tenant work you actually did, and time a spouse spent if the rules count it. A single line that says various, 800 hours, is not a log.

Short stay activity has a further substantiation problem when someone treats the loss as nonpassive because the average stay was seven days or fewer. Booking records and an hour log both have to exist. A property manager who did the work can defeat the claim even when the average stay is short. Tell us who turned the unit.

Bring the log if it exists. If the log was never kept, say that before we talk about the title. The missing log ends the professional question for that year.