State Specific Question About: KENTUCKY (KY)

My participation in the day-to-day managing of my 5 unit building is very minimal. I have a manager that writes the leases and contacts me for approval on new tenants as to go or no go. I have done things such as clean gutters, repair siding, replace sump pump etc.

My question is: What constitutes active vs. passive participation in this business venture? Thank you in advance.

Have you searched IRS? Normally the code is written in a fair manner. I would expect that if you are as involved as mentioned that you could pass for active. If you feel you don't, I would do that little bit extra to make the grade.

" Under IRC sections 469(c)(2) and (c)(4), income from rental real estate is generally considered passive activity income, regardless of the taxpayer's level of involvement in the property. However, the recharacterization

Recharacterization

The treatment of a contribution as being made to another type of IRA instead of the IRA that the contribution was initially made.

Notes:

For instance, an individual may make a participant contribution to a Traditional IRA, but may later recharacterize the contribution to a Roth IRA.

Roth IRA conversions can be reversed by means of a recharacterization, however, this movement of assets must include earnings (or losses). or self-rental rule of regulations section 1.469-2(f)(6) provides that rental realty income is not passive activity income if the property is rented for use in a trade or business in which the taxpayer materially participates. This rule prevents a taxpayer with passive activity lossesPassive Activity Loss (PAL)

A loss incurred in participating in passive investing.

..... Click the link for more information. from artificially creating passive activity income to absorb the losses. "

According to the Nolo (by Attorney Stephen Fishman) book, "Every landlord'd Tax Deduction Guide,":

"You don't have to work any set number of hours to actively participate, you simply have to be the person who makes the final decisions about approving tenants, arranging for repairs, setting rents and other management tasks..." it says a bunch more. It's definitely a book worth purchasing.

I'm interested in this thumbs-up, thumbs-down on approving tenants; presumably is the PM is doing the screening (and doing it properly), he would present to you in the end only those tenants who qualify. On what basis, then, do you -- or CAN you -- approve one over the other? When I, um, voiced an opinion on the acceptability of a candidate I just happened totally by chance to encounter, I was told in no uncertain terms that I had no voice in the matter; talk about scared witless! Fortunately that conversation ended our partnership, but in addition to the contract giving him the vote, he also pointed out the whole discrimination of the five protected classes thing. Even on my advisement, he couldn't discriminate for those reasons.

Thank you for the responses. Based on calls to the IRS and other info. I have decided that there is no true "acid test" that determines active vs. passive. I will take my chances and continue to remain "active". The IRS had a hard time when, I called them, determining whether replacing a sump pump was an improvement or maintenance. I called it an improvement based on their advise. The hot water heater I just replaced in one of my units is "repairs" not an improvement. After all, is having hot water a improvement?

Here is the way I understand it: if you have a full time W-2 job, then you are a passive investor. Otherwise, you can demonstrate that you are an active participant by keeping some records that show you devote a certain number of hours yearly (used to be 750) to the venture. I believe that you can also qualify as what the IRS considers a "real estate professional" by getting a RE license. Now, I know that makes no sense at all, but we are dealing with the IRS here.

If your other income is over a certain amount, your losses are limited, but I think they are limited to no more than $25K per year regardless - could be wrong about that. But anything you can't write off isn't lsot, it is just deferred to the future, either when you can write off or when you sell the property.

Someone made ref to an IRS Pub - I think what you want is Publication 527 - Residential Rental Property - download in pdf form from irs.gov.

And finally, I believe that investing in a tax professional who knows RE is always money well spent for anyone doing the rental property thing. Don't try to do it yourself. In addition to the above topic, there is the matter of depreciation - my eyes cross when I look at those depreciation schedules.