Tax

Deducting your rental property tax losses against your other income is tricky, as you likely know. You have to get the tax law to treat you—say, a computer engineer—as a tax-code–defined real estate professional.

Let’s say you get there. Does that status allow immediate use of suspended passive losses? Unfortunately, the answer is no. Here’s why.

Understanding Passive Loss Rules

The tax code limits passive loss deductions to passive income, with any excess carried forward to future years. You release the carried-forward losses when you

• have offsetting passive income from the same or other passive activities, or
• completely dispose of the activity generating the loss.

Real Estate Professional Status

Qualifying as a real estate professional under IRS rules requires meeting two tests annually:

• Spend more than 50 percent of your work time in real property trades or businesses.
• Perform at least 750 hours of your work in real property trades or businesses.

Material Participation

Additionally, you must materially participate in the rental activity to create non-passive losses.

The Two-Part Solution 

Meeting (1) the real estate professional test and (2) the material participation standard allows current-year rental losses to offset non-passive income, such as wages or business income.

Impact on Prior Passive Losses

Qualifying as a real estate professional is not retroactive. Suspended passive losses from prior years remain subject to the original rules. You can use the prior suspended losses in the following ways:

• To offset passive income from the same or other passive activities
• When you completely dispose of the activity that created the suspended passive losses

Key Takeaways

Real estate professional status offers valuable tax benefits for your rental properties but does not free up prior passive losses. Annual testing is required to maintain this status. 

If you want to discuss your rental properties and the passive loss rules, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• January 15, 2025

Here’s an update on the Corporate Transparency Act (CTA) and its beneficial ownership information (BOI) reporting requirements. Recent legal developments have created uncertainty around filing deadlines, and it’s important to understand your options and responsibilities.

Background on the CTA

The CTA requires many smaller corporations and LLCs to file a BOI report with FinCEN, identifying and providing contact information for the individuals who own or control the entity. This report is used solely for law enforcement purposes and is not made public.

Initially, businesses in existence before 2024 were required to file by January 1, 2025, while new businesses formed in 2024 had a 90-day filing deadline. However, recent court rulings have disrupted these deadlines.

Current Status

As of today, January 1, 2025, a nationwide injunction is in place, delaying all BOI filing requirements. While the injunction is active, you are not required to file a BOI report, and no penalties apply for non-filing. The injunction impacts the following entities:

• Businesses formed before 2024 with a January 1, 2025, deadline
• New businesses formed in 2024 with a 90-day filing deadline
• Businesses with changes requiring updates to previously filed reports

Voluntary Filing Option

Although filing is not currently required, you may file voluntarily. This can simplify compliance by avoiding last-minute deadlines if the injunction is lifted. Should the injunction end, deadlines may resume with little notice, so being prepared is essential.

Takeaways

While the CTA remains under judicial review, you are not obligated to file your BOI report. But it may be prudent to prepare now by gathering the necessary information. If you have already filed, no further action is needed unless there are reportable changes.

If you want to discuss the CTA, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• January 10, 2025

Over the years, the IRS has enacted voluminous regulations that interpret ambiguous tax code provisions or fill in administrative gaps. 

Indeed, IRS regulations dwarf the tax code: the tax code is about 2,600 pages long, while all the rules written by the IRS amount to over 16,000 pages.

Think an IRS regulation is unfair or overreaches? Until now, there wasn’t much you could do about it. A 40-year-old legal rule called Chevron deference (or the Chevron doctrine) required courts to defer to government regulations so long as they were reasonable. After all, the IRS and other federal agencies were the experts.

Because of the Chevron doctrine, courts rarely struck down IRS regulations. Taxpayers just had to live with them. IRS regulations effectively had the force and weight of law.

This is now changing. 

In a landmark court decision called Loper Bright Enterprises v. Raimondo, the United States Supreme Court overturned the Chevron doctrine. Regulations enacted by the IRS and other federal agencies will no longer be given automatic deference. Courts will now make their own decisions based on their interpretations of the tax laws passed by Congress. 

But don’t assume that any existing regulation is now invalid. The Supreme Court held that its Loper Bright decision applies only prospectively—that is, it doesn’t invalidate or eliminate any existing regulations. The ruling also preserves earlier court decisions that used the Chevron doctrine to uphold regulations.

Nevertheless, IRS regulations are now more vulnerable to legal attack. Here are some possible ramifications:

• There will doubtless be more legal challenges to IRS regulations. Many are already underway. For example, the IRS’s new cryptocurrency regulations will face numerous legal challenges.
• The IRS may enact fewer regulations and rely more on subregulatory guidance such as revenue rulings and procedures, notices, and FAQs. Such guidance was never entitled to Chevron deference.
• With the demise of the Chevron doctrine, the IRS may need to be more restrained when it writes its regulations to avoid having them struck down by the courts.
• The IRS has had a long-standing internal policy that it will not administratively settle disputes with taxpayers based on challenges to the validity of IRS regulations. This could now change. The IRS may prefer to settle such disputes rather than take its chances in court. 

• By Leon Clinton
• January 6, 2025