Q&A: Does Grouping Rental Properties Release Suspended Losses?

Question

I am a CPA who got a new client today. She is a top real estate broker in my city.

She has an S corporation through which she reports all her real estate brokerage and sales activities. In reviewing her personal return filed jointly with her husband, I noticed that she also has five rental properties reported on Schedule E.

Her prior CPA classified the rental properties as passive activities, and she has suspended passive losses of $72,000.

We are going to file her current-year tax return. I know she definitely qualifies as a “real estate professional” for her rental properties. Here are my questions:

1. Can I elect to group all five rental properties to make the 750-hour threshold easy to attain for 2021?
2. If she qualifies as a real estate professional, can I deduct the prior years’ $72,000 in suspended passive losses so as to reduce her current-year taxable income?

‍

Answers

Yes, you could elect to group the rentals, but that may not be necessary. Your client’s real estate brokerage and sales activities, along with the work on the five rentals, count toward the 750-hour rule. We have to guess that she easily qualifies as a real estate professional. 

If she does qualify under the 750-hour rule and if she materially participates in each of the five properties, she’s better off not grouping the activity.

When she groups, the passive rules apply to the group rather than to the individual properties.

You do not release the prior-year suspended passive losses by simply qualifying as a real estate professional and/or grouping. To realize the benefits of the suspended losses, you need passive income.

‍