What's the Active vs Passive ownership threshold for Real Estate Deal loss deductions?

So if my income is over $150k, I'm basically stuck with the passive loss carryover even if I'm actively participating? Also, what counts as "management decisions" - like if I just approved the tenant selection but my property manager did everything else, would that count?

Yes, if your modified AGI exceeds $150,000, you won't be able to use the $25,000 active participation exception, regardless of your involvement level. You'll be limited to offsetting the losses against passive income or carrying them forward. For management decisions, approving tenants is definitely one qualifying activity, but ideally you'd want to document multiple areas of involvement. Things like approving repairs over a certain dollar amount, reviewing financial statements, making decisions about rental rates, or authorizing capital improvements all count. The key is showing meaningful participation in the management aspects, not just occasional involvement.

Does it actually help with record keeping? Like, can I log my hours spent on property management activities through the tool? I'm terrible at keeping track and I've heard horror stories about people getting audited and having no proof of their time spent.

I'm skeptical - how does an AI tool actually determine if you're active vs passive? Isn't that something a real tax pro needs to evaluate based on your specific situation? Seems like dangerous territory to rely on an algorithm for something the IRS scrutinizes so heavily.

Yes, it actually has a built-in activity tracker where you can log hours and activities related to your properties. You can even upload documents, receipts, and communication with tenants or property managers as supporting evidence. This creates a digital paper trail that's organized and easily accessible if you ever face an audit. The AI doesn't make the final determination of your status - you're right that would be risky. What it does is analyze your activities against IRS guidelines and court precedents to show you where you stand. It flags potential issues and recommends additional documentation or activities that could strengthen your position. It's more like having a knowledgeable assistant that helps you prepare your case, not something that makes tax decisions for you.

How does this actually work? Do they have some special line to the IRS or something? I'm confused how a third party service can get you through faster when the IRS phone lines are always jammed.

Yeah right. Nothing gets you through to the IRS faster. I've literally spent cumulative DAYS of my life on hold with them. If this actually worked, everyone would be using it and the IRS would probably shut it down.

They don't have a special line - they use technology to wait on hold for you. Their system dials in, navigates the IRS menu options, waits in the queue, and then calls you when a human agent is about to pick up. So you're still waiting the same amount of time that you normally would, but you don't have to listen to hold music or stay tethered to your phone for hours. I was also super skeptical at first. I thought it sounded too good to be true. But the reality is they're just solving the problem of being stuck on hold - they can't magically make the IRS answer faster. The reason everyone doesn't use it is probably because most people don't know about it yet, and some people might not want to pay for something they could technically do themselves (even if it's miserable).

Wait, I thought the material participation tests don't apply to rental activities because they're automatically passive? How did you get around that rule? I'm really interested because my situation sounds similar to yours.

You're right that rental activities are generally considered passive by default, but there are exceptions. The material participation tests can apply if you qualify for the real estate professional exception (750+ hours, more than half your work time). However, what I was referring to is slightly different - I should have been clearer. What worked in my case was qualifying for "active participation" (which is a lower bar than material participation) to get access to the $25,000 special allowance for rental real estate activities. Plus, I elected to group all my properties as a single activity, which helped me meet the hours requirements across multiple properties. Documentation is absolutely critical though - I keep a detailed log of all activities, communications with tenants/property managers, and time spent. I also make sure I'm the one making all final decisions even if I have property managers handling day-to-day operations.

This is actually what I ended up doing last year. Had a property with $43k in suspended passive losses that I couldn't use. Sold the property (even at a small additional loss) and was able to deduct ALL the accumulated passive losses against my W-2 income. Saved me about $12k in taxes. Sometimes cutting your losses is the smartest financial move.

This is a great point that I hadn't considered! Does the spouse need to be actively involved in ALL the properties to qualify, or just meet the general real estate professional requirements? Also, do both spouses need to be on the title, or can one spouse's professional status cover properties owned solely by the other spouse?

The spouse needs to meet the real estate professional requirements (750+ hours annually in real estate activities AND more than half their working time in real estate), but they don't need to be involved in every single property you own. Once they qualify as a real estate professional, that status can apply to rental properties owned by either spouse or jointly owned properties when filing a joint return. However, there's an important caveat - the non-real-estate-professional spouse still needs to "materially participate" in each specific rental activity to avoid passive treatment. This usually means being significantly involved in management decisions for that particular property. So while your spouse's professional status opens the door, you can't be completely hands-off and still get active treatment. For properties owned solely by the non-professional spouse, the professional spouse would need to be involved enough in that property's management to establish material participation for the couple as a unit.