One spouse can earn the family’s salary while the other works in real estate. Yet, the rental losses on their joint return may still be passive.

One spouse can earn the family’s salary while the other works in real estate. Yet, the rental losses on their joint return may still be passive.

Does one spouse qualify as a real estate professional? Does the couple materially participate in the rental activity producing the loss?

One spouse must perform more than 750 hours of services in real property trades or businesses in which that spouse materially participates. That work must also account for more than half of that spouse’s personal services in all trades or businesses during the year. The same spouse has to satisfy both tests.

If you have 500 qualifying hours and your spouse has 400, your family has 900 hours. The combined total does not satisfy the 750-hour test for either of you. A full-time job outside real estate also makes the more-than-half test difficult, even when you spend substantial time on rentals.

For material participation in a rental activity, the work you and your spouse perform in that activity counts together.

Suppose your spouse qualifies through work in a real estate brokerage, and your family also owns several rentals. The brokerage hours may establish professional status, but they do not establish material participation in those rentals. Hiring a property manager does not automatically prevent material participation. You need to know what work you and your spouse actually perform and which test that work satisfies.

Rental real estate interests are generally tested separately unless you make the election to treat all of them as one activity. Substantial time across a portfolio may still leave you short of the participation test for an individual rental.

I would want to see the work before projecting the deduction. Who deals with tenants, supervises repairs, reviews leasing decisions and manages the properties? Which hours are yours? Which are your spouse’s? Which belong to the rentals, rather than the brokerage or development business?

Keep calendars and descriptions of the work as you do it. Reconstructing a year in March is much harder. Professional status is determined each year, and your family’s jobs and responsibilities change.

You need to establish professional status, establish material participation in the rentals, and establish that the loss is deductible after basis, at-risk and other applicable limits to use current rental losses against the family’s salary and other nonpassive income.