Real Estate Professional Status Allows Rental Losses to Offset Active Income

High-earning taxpayers can use real estate professional status to offset active income with rental losses that would otherwise be classified as passive. The IRS treats rental real estate losses as passive unless a taxpayer qualifies under specific criteria. Qualifying taxpayers may apply those losses against wages or other active earnings.

Real estate professional status changes this treatment when one spouse meets the required participation thresholds. Taxpayers still need to generate a reported loss through depreciation and property expenses even when cash flow remains positive.

Taxpayers must spend more than 750 hours per year on real estate activities. More than half of their total working hours must involve real estate. Jennifer and Paul Tessmer-Tuck built a 16-property portfolio between 2020 and 2026 after Paul reduced his teaching hours to part-time.

"For a married couple, if one person has the real estate professional status, then as a couple, we can count our real estate losses against my W-2 income," Jennifer said. Letizia Alto and Kenji Asakura, both physicians, scaled back hospital work after building a rental portfolio.

Asakura transitioned to part-time hospital work in 2015 to meet the time requirements. CPA Kristel Espinosa said the IRS may closely scrutinize claims and requires documentation showing real estate as the primary activity. "You can have other jobs, but you just have to be able to show that to the IRS if ever audited that the real-estate business really is your main thing," she said.