If you own the building that your business is located in, and rent it back to yourself the losses are not treated always treated as “passive”. Firms that rent property to a closely held corporation in which the owner works more than 500 hours per year triggers a special rule that treats net rental income as “nonpassive”.

Why does this matter? Rental income and losses are normally treated as passive activities. If you have a number of rental losses that are carried over due to not meeting the real estate professional test or if your income is too high, the only way to claim those passive losses is by generating passive income. A case has come down from the tax court where a man set up two pass-through businesses to lease tractors and trailers to his corporation. Due to the fact his firms rented property to a closely held corporation which he worked more than 500 hours per year, the income became non-passive. He had tried to write off the non-passive losses against his passive carry forward losses, the IRS came in and recharacterized the amounts.

This is another case where knowing the rules can help you strategize a better way to write off your losses. Since his rentals property with the passive losses were not generating revenue, maybe it would have been good for him to re-evaluate the expenses he was taking on those properties. Could it be that some of those expenses were really related to his other business instead of the passive income properties?

To meet the recently established requirements of the Internal Revenue Service as described in their circular 230 we hereby advise you that any tax advice contained in this communication was not intended or written to be used, and it cannot be used, for the purpose of avoiding penalties that may be imposed on the taxpayer by Internal Revenue Code.

Kam Wiese, CPA
Kluge and Wiese, LLP
620 N. Hwy 6, PO Box 500
Gretna, NE 68028-0500
All rights reserved.