Are You an Active or Passive Real Estate Investor?

[Walter Jones]

With tax season in full swing, now is the perfect time to understand whether you’re an active or passive real estate investor. The difference isn’t just about how involved you are—it also affects how you report income, deduct expenses, and minimize taxes.

Active Real Estate Investors

Active investors are directly involved in managing properties, making decisions, and overseeing operations. This includes house flippers, short-term rental operators, and landlords who self-manage their rentals.

Accounting & Tax Treatment:

• Income is earned and taxed as ordinary income.
• You can deduct business expenses (mortgage interest, depreciation, repairs, etc.).
• May qualify for Real Estate Professional Status (REPS), allowing rental losses to offset other income.
• Subject to self-employment tax if considered an active trade or business.

Passive Real Estate Investors

Passive investors provide capital but don’t actively manage properties. This includes those who invest in syndications, REITs, or private funds.

Accounting & Tax Treatment:

• Income is typically passive and taxed at capital gains rates or as dividends.
• Depreciation benefits may pass through via K-1 tax forms (for syndications).
• Losses are generally considered passive and can only offset passive income, not active income.
• No self-employment tax obligations.

Why This Matters—Especially Now

With tax deadlines approaching, understanding your classification can help you maximize deductions and avoid surprises when filing. Active investors may be able to offset more taxable income, while passive investors should ensure they have the correct documentation (like K-1s).

Not sure where you fall? Now is the time to talk with a CPA who specializes in real estate before filing your return. Whether you're hands-on or hands-off, knowing the tax rules can help you keep more of your profits.

[Charles Perkins]

A point of clarification.

Landlords that self manage there own rental properties may be active RE investors, but generate rental income are not subject to SE tax even for REPs.  For tax purposes they would produce non-passive income.