Section 179 and rental property

[Whoops2u]

What is the name of your state? CA

Can you use section 179 on rental property?

My CPA died and I went to an EA to complete my taxes this year. He told me my prior returns (Prepared by the CPA.) were in error and I have to amend them back three years and depreciate newly purchased items for this year as capitalization to be depreciated. The reason given is that section 179 is only available for use in an active "trade or business". Since rental property is technically not considered a "business" he says I can't and couldn't accelerate depreciation. He even mentioned I might have to get permission from the commissioner to change my accounting to conform.

My problem is, I'm considered to be a "real estate professional" and have been in all the years being discussed. When the statute is fulfilled, I get to treat my properties I report on Schedule E as non-passive and can take the entire loss rather than have it limited by my income. My understanding is this difference is a part of why rentals are generally not considered a business, you are limited in the losses you can take rather than getting the benefit of deducting all ordinary and necessary expenses.

Assuming I've made all the proper elections, can I take advantage of 179 in years I am considered a real estate professional?

 

[LdiJ]

What is the name of your state? CA

Can you use section 179 on rental property?

My CPA died and I went to an EA to complete my taxes this year. He told me my prior returns (Prepared by the CPA.) were in error and I have to amend them back three years and depreciate newly purchased items for this year as capitalization to be depreciated. The reason given is that section 179 is only available for use in an active "trade or business". Since rental property is technically not considered a "business" he says I can't and couldn't accelerate depreciation. He even mentioned I might have to get permission from the commissioner to change my accounting to conform.

My problem is, I'm considered to be a "real estate professional" and have been in all the years being discussed. When the statute is fulfilled, I get to treat my properties I report on Schedule E as non-passive and can take the entire loss rather than have it limited by my income. My understanding is this difference is a part of why rentals are generally not considered a business, you are limited in the losses you can take rather than getting the benefit of deducting all ordinary and necessary expenses.

Assuming I've made all the proper elections, can I take advantage of 179 in years I am considered a real estate professional?

I do not have an answer for you at this point. I would have to research that. However, I do have something for you to look at that may make the issue somewhat moot.

https://www.rentalsoftware.com/real-estate-income-taxes/2500-de-minimis-safe-harbor/

This above site does a good job of explaining the de minimis safe harbor rules for expensing items purchased for rental properties. There are also limits to 179 expensing in general. Even with an active activity you cannot 179 expense beyond break even. There is also bonus depreciation which allows a great deal to be expensed as depreciation the first year.

 

[Whoops2u]

I do not have an answer for you at this point. I would have to research that. However, I do have something for you to look at that may make the issue somewhat moot.

https://www.rentalsoftware.com/real-estate-income-taxes/2500-de-minimis-safe-harbor/

This above site does a good job of explaining the de minimis safe harbor rules for expensing items purchased for rental properties. There are also limits to 179 expensing in general. Even with an active activity you cannot 179 expense beyond break even. There is also bonus depreciation which allows a great deal to be expensed as depreciation the first year.

Thank you for the reply, I appreciate it. I have made the de minimis election for the last few years. It seems that helps on determining the difference between when capitalization and expensing is more appropriate for the item. Here, there is no real argument some of this should be capitalized--absent a section 179 election that applies.

 

[adjusterjack]

I went to an EA

What is an EA for those of us that are acronymically challenged?

He might be right. According to the IRS Publication 946, Page 17:

To qualify for the section 179 deduction, your property must have been acquired for use in your trade or busi-ness. Property you acquire only for the production of in-come, such as investment property, rental property (if renting property is not your trade or business), and prop-erty that produces royalties, does not qualify.

https://www.irs.gov/pub/irs-pdf/p946.pdf

Whether being "considered" a real estate professional makes any difference is beyond me.

 

[LdiJ]

What is an EA for those of us that are acronymically challenged?

EA=Enrolled Agent. Someone who has taken and passed an exam required by the IRS...and who is required to do continuing education. They are also permitted to represent a client before the IRS.

He might be right. According to the IRS Publication 946, Page 17:



https://www.irs.gov/pub/irs-pdf/p946.pdf

Whether being "considered" a real estate professional makes any difference is beyond me.

There are Passive activities and Active activities. Passive activities are where things like losses and other things are limited.

Owning rental property is normally a passive activity. However, if someone spends enough time annually doing it, then the become a real estate professional and it is no longer a passive activity for them, it becomes an active activity. That is a simplistic explanation but I think that its enough for the purpose of your inquiry.

 

[Whoops2u]

There are Passive activities and Active activities. Passive activities are where things like losses and other things are limited.

Owning rental property is normally a passive activity. However, if someone spends enough time annually doing it, then the become a real estate professional and it is no longer a passive activity for them, it becomes an active activity. That is a simplistic explanation but I think that its enough for the purpose of your inquiry.

This is the key to the claim rental properties are not a "trade or business". The code allows all the ordinary and necessary expenses of doing business as a deduction.

26 USC 162
(a)In general
There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including—

Absent a real estate professional status, rental property losses are limited by passive income and by income limits. (For instance, a general limitation on the rental losses you can take is $25,000 over passive income. That is rateably reduced after a certain amount of income until you can't take any loss and the passive loss is considered suspended.

 

[Whoops2u]

It seems the new section 199A in the proposed regulations released today has essentially the same issue and commentary I see say it is unresolved. Is renting real property a trade or business if the owner is a real estate professional?[With qualifying material participation in the activity.] (Rhetorical question, all anyone has is an argument as the proposed regs are not clear.)

 

[LdiJ]

It seems the new section 199A in the proposed regulations released today has essentially the same issue and commentary I see say it is unresolved. Is renting real property a trade or business if the owner is a real estate professional?[With qualifying material participation in the activity.] (Rhetorical question, all anyone has is an argument as the proposed regs are not clear.)

We were discussing this in the office today and its pretty clear (at least to us) that you cannot 179 expense even being a real estate professional. However again, if you follow the de minimus safe harbor rules I think its kind of a moot point. Anything big enough that it won't fly under the safe harbor really should be depreciated anyway for the best overall economic results.

 

[adjusterjack]

It seems the new section 199A in the proposed regulations released today has essentially the same issue and commentary I see say it is unresolved. Is renting real property a trade or business if the owner is a real estate professional?[With qualifying material participation in the activity.] (Rhetorical question, all anyone has is an argument as the proposed regs are not clear.)

A lot depends on what you mean by real estate professional. Are you a licensed real estate agent or broker and your income primarily derived from commissions that you earn on your clients' sale or purchase of real estate? If yes then your rental property activities are likely passive since they are a secondary source of income.

When I had my rentals I had a full time job as an insurance investigator. I took care of my rentals on my own time. It was passive activity. Though I also took Section 179 deductions under the de minimus rules.

By the way, how many rentals do you own?

 

[LdiJ]

A lot depends on what you mean by real estate professional. Are you a licensed real estate agent or broker and your income primarily derived from commissions that you earn on your clients' sale or purchase of real estate? If yes then your rental property activities are likely passive since they are a secondary source of income.

When I had my rentals I had a full time job as an insurance investigator. I took care of my rentals on my own time. It was passive activity. Though I also took Section 179 deductions under the de minimus rules.

By the way, how many rentals do you own?

Section 179 and the de minimus rules are two completely different things, with completely different sets of rules.

 

[Whoops2u]

A lot depends on what you mean by real estate professional. Are you a licensed real estate agent or broker and your income primarily derived from commissions that you earn on your clients' sale or purchase of real estate? If yes then your rental property activities are likely passive since they are a secondary source of income.

When I had my rentals I had a full time job as an insurance investigator. I took care of my rentals on my own time. It was passive activity. Though I also took Section 179 deductions under the de minimus rules.

By the way, how many rentals do you own?

I manage/general partner many entities that I materially participate in (by ownership) that own and rent real property as their sole function. I do this for more than 1/2 of my time and for more than 750 hours a year. I also have a couple of properties in my own name. I have elected to aggregate and I materially participate in (by non-owner-type efforts) to a safe harbor level (500 hours). I am not here to discuss if I am a real estate professional or if I materially participate in my activities. See IRC 469(c)(7).