"Real Estate Professional" Loss Questions

[Mel Selvidge]

My husband and I purchased a vacation rental property four hours from where we live in January.  It was gutted when we got it.  Working with a contractor who rented it during the renovation, we got it remodeled, furnished, and ready for vacation rental by Memorial Day.  It has rented well, but because of the late start and pile of deductions associated with buying a whole home's worth of furnishings at once, I strongly suspect it will show a loss at the end of the year.  I'm looking at getting a second vacation rental property that would definitely be a loss as there is little time left to recover initial costs.  

My questions:

I've read that activities need to be "grouped" to count together as activities of a "real estate professional" for tax losses.  What is the acceptable procedure for "grouping" activities at different properties?

If I incur a loss on my RE business, can the income only be subtracted from other income that I earned, or can it be subtracted from my husbands' (married filing jointly)?

Is this loss something that could trigger the AMT if we weren't already liable for it?  If we do get the AMT, is the loss still deductible?

Thanks for your insights and time!

[Dave Toelkes]

@Mel Selvidge 

If you feel you meet the more than 50% participation and at least 750 hours test for real estate professional status, but you are not spending at least 750 hours on each rental property, then grouping all your rentals into one real estate activity may let you get past the 750 hour hurdle.

The election to group your rentals into one activity is done by filing a statement with your income tax return.  This statement must contain a declaration that you are a qualifying taxpayer for the taxable year and that you are making the election pursuant to section 469(c)(7)(A) [§1.469-9(g)].

From Vernon Hoven's The Real Estate Investor's Tax Guide (4th ed) , wording for your statement might be:  "In accordance with §1.146-9(g)(3), the taxpayer clearly states that he (or she) is a qualifying real estate professional under IRC §469(c)(7), and elects under IRC Sec 469(c)(7)(A) to treat all interests to real estate as a single rental real estate activity."

Note: Grouping is NOT accomplished by putting all the rentals into a single LLC. Even if owned by a single LLC, each rental property is still a separate real estate activity with its own 750 hours test for real estate professional status.

Since written statements cannot be e-filed, you will have to mail your return.

As mentioned before, there is no deduction allowed for the cost of getting a property ready for rental use.  Only after the property has been placed in service as a rental, may you begin to deduct costs incurred from that date forward.  Until then, nearly every penny spent specifically on that property is added to the cost basis for the property and recovered over time through depreciation.  Costs of operating your business however, may be deductible on Schedule C.  You may have the cost for business cards, promotional brochures, direct mailing costs, office supplies, etc that can be deducted as business expenses on Schedule C.  Your CPA can give you more specific guidance.