(income tax question) Active vs. Passive

[George P.]

My CPA advised that since I will be managing the rental myself, rental income qualifies as Active (=earned) income (vs. Passive).
Does that sound right?

[David Beard]

It doesn't sound right to me. Even if you materially participate in real estate rental activity, it's still considered passive income in the context of real estate investments.

Real estate investors do benefit from a special rule which permits up to $25k of passive losses to be deducted against ordinary income in a tax year, but this begins phasing out for married taxpayers starting at 100k AGI, and completely phases out at 150k AGI.

If your properties are generating tax losses (after depreciation and interest), then you can probably find much better cash flowing deals, though I acknowledge that higher end rentals in certain areas can make sense as a longer term cap gain play.

If you can be deemed a real estate "professional" (some rules involved here, but you need to do RE 750 hours a year and generally can't have another full-time job -- or your spouse can also qualify if they're on title to the property), then you're not subject to this 25k passive loss limitation. You can also take some additional deductions such as the home office deduction, that would not be available to you as a mere "investor".

That's my interpretation, though I'm not a CPA.