Per the IRS, a “passive loss” is a loss from a business activity in which a taxpayer does not engage or participate materially. The most common ways that the IRS deems a taxpayer to have materially participated in a business, and thereby avoid the passive loss limitation rules, are as follows;

1. A taxpayer participates more than 500 hours in the activity during the year.

2. A taxpayer’s participation constitutes substantially all of the participation in the activity.

3. A taxpayer work’s more than 100 hours per year in the activity and not less than any other person, including non-owners.

4. A taxpayer works more than 100 hours per year in each of several activities, totaling more than 500 hours per year in all such activities.

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Ask TaxGuru Please refer to the legal disclaimer.

My wife and I have a rental property with $65k in carry over losses. We are not real estate professionals, but after reading the Material Participation Rules, I believe we may qualify for under #2 since we do not involve a real estate agency to rent or manage our property. Perhaps I'm wrong, please advise. Additionally, is we do qualify, will we be able to claim the $65k in losses or be subject to the $25k cap?

If we don't qualify, are there any other options other than becoming a real estate professionals to claim this loss?