When you rent property, the IRS automatically considers the income and losses from the activity as passive. However, if you are a real estate professional, the income and losses will not be considered passive. The main consequences of passive activity are that:
- Passive income is currently subject to the 3.8% net investment income tax (NIIT), and
- Passive losses generally are deductible only against passive income, with the excess being carried forward.
One note, the NIIT is part of the Affordable Care Act (ACA) and might be eliminated under ACA repeal and replace legislation or tax reform legislation. But if/when such legislation is passed and signed into law is uncertain. Even if the NIIT is eliminated, the passive loss issue will still be an important one for many taxpayers investing in real estate.