Rental Hobby

Today TaxMama hears from Kevin in Arizona, who wants to know, “How often does a rental property have to be rented or income made to qualify as a rental? Looking at the numbers, I doubt ours can go cash positive for at least 4 years. From reading your articles, it seems that the IRS will call it a “hobby”?”

Dear Kevin,

That’s the interesting thing about rental properties. They tend not to show a profit for many years. That’s why IRS has all these passive loss rules and active participation rules.

Don’t worry too much about the property being treated as a hobby just because the bottom line is a loss. If the property is rented out to a long-term tenant, in other words, someone who lives there year-round, at fair market rent, you should be fine. You may be able to deduct losses up to $25,000 each year. Any losses you can’t deduct this year will be carried to future years.

However, if the property is rented out to family members paying below-market rent, you probably won’t be able to deduct your losses at all.

The other issue your question brings up, since you asked how often it must be rented – is this a vacation property? You use it part of the time, and you rent it out part of the time?

That has a whole other set of rules. You’ll need to do some reading. You’ll find lots of information here – at rentaltaxes.com . http://rentaltaxes.com/mixed-use_property.html

It also has links to all relevant IRS forms and publications, here: http://rentaltaxes.com/forms.html

And remember, you can find answers to all kinds of questions about rental income and other tax issues, free. Where? Where else? At TaxMama.com

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