--- title: Are You a Tax-Favored Real Estate Professional? description: Machen McChesney shares the various taxpayer-friendly rules that apply to owners of rental real estate, including the exceptions to the PAL rules. Take advantage of all available rental real estate tax breaks. image: https://info.machen.cpa/hubfs/Houses%201346495722-1.jpeg --- [Family of Services](http://machenmcchesney.com/about-us/family-of-companies/)  |  [CPA & Business Advisory](http://machenmcchesney.com)  |  [Payroll, HR & Benefits](http://focuspaysolutions.com/)  |  [Wealth Management](http://machenmcchesney.com/services/financial-planning-and-wealth-mangement-services/) Auburn-Opelika (334) 887-7022 | Montgomery (334) 244-8900 [![mm-cobrand-fd-blues](https://info.machen.cpa/hs-fs/hubfs/mm-cobrand-fd-blues.png?width=279&height=100&name=mm-cobrand-fd-blues.png)](http://machenmcchesney.com) Search this site on Google Search Google Search this site on Google Search Google - [Client Portal](https://machenmcchesney.sharefile.com/Authentication/Login) - [1040 Electronic Organizer](https://www.my1040data.com/account/login/HT7902990) - [LinkedIn](https://www.linkedin.com/company/675439?trk=tyah&trkInfo=idx%3A1-1-1%2CtarId%3A1424436970395%2Ctas%3Amachen+mcchesney) - [Facebook](https://www.facebook.com/machenmcchesney) - [Google](https://plus.google.com/101356546927388458481) - [Twitter](https://twitter.com/machenmcchesney) - About Us - [Welcome](http://machenmcchesney.com/about-us/welcome/) - [Affiliations and Associations](http://machenmcchesney.com/about-us/affiliations-and-associations/) - [Community Events](http://machenmcchesney.com/about-us/community-events/) - [Family of Companies](http://machenmcchesney.com/about-us/family-of-companies/) - [History](http://machenmcchesney.com/about-us/firm-profile-history/) - [Mission and Values](http://machenmcchesney.com/about-us/mission-and-values/) - [Team Directory](http://machenmcchesney.com/about-us/team-directory/) - Services - [Accounting & Outsourcing](http://machenmcchesney.com/services/accounting-outsourcing/) - [Audit and Assurance Services](http://machenmcchesney.com/services/audit-assurance/) - [Business Advisory Services](http://machenmcchesney.com/services/business-advisory/) - [Business Valuation Services](http://machenmcchesney.com/services/business-valuation-services/) - [Family Office Services](http://machenmcchesney.com/services/family-care/) - [Financial Planning & Wealth Mangement Services](http://machenmcchesney.com/services/financial-planning-and-wealth-mangement-services/) - [Individual Services](http://machenmcchesney.com/services/individuals/) - [Taxation](http://machenmcchesney.com/services/taxation/) - Who We Serve - [Construction & Real Estate](http://machenmcchesney.com/industries/construction-real-estate/) - [Credit Unions](http://machenmcchesney.com/industries/credit-unions/) - [Government & Not-For-Profits](http://machenmcchesney.com/industries/governmental-not-for-profit/) - [Healthcare & Professional Services](http://machenmcchesney.com/industries/healthcare-and-professional-services/) - [Hospitality, Restaurant & Retail](http://machenmcchesney.com/industries/hospitality-restaurant-retail/) - [Manufacturing, Distribution & Automotive](http://machenmcchesney.com/industries/manufacturing-distribution-automotive/) - [Success Stories](http://machenmcchesney.com/success-stories) - Resources - [Blog](https://info.machenmcchesney.com/blog) - [E-Newsletter Archive](http://machenmcchesney.com/resources/e-newsletter-archive/) - [Financial Calculators](http://machenmcchesney.com/resources/financial-calculators/) - [Financial Terms Glossary](http://machenmcchesney.com/resources/financial-terms-glossary/) - [Helpful Articles](http://machenmcchesney.com/resources/newsletter/) - [Tax Calendar](http://machenmcchesney.com/resources/tax-calendar/) - [Tax Links](http://machenmcchesney.com/resources/tax-links/) - [Track Your Refund](http://machenmcchesney.com/resources/track-your-refund/) - [Sign Up for Our E-Newsletter](http://machenmcchesney.com/resources/e-newsletter/) - [Subscribe to Our Blog](http://machenmcchesney.com/resources/subscribe-to-the-machen-mcchesney-blog/) - News & Events - [Press Releases](http://machenmcchesney.com/news-events/press-releases/) - [Upcoming Events](http://machenmcchesney.com/news-events/upcoming-events/) - Careers - [Our Culture](http://machenmcchesney.com/careers/culture/) - [Benefits](http://machenmcchesney.com/careers/benefits/) - [Our Stories](http://machenmcchesney.com/careers/our-stories/) - [Current Openings](http://machenmcchesney.com/careers/current-openings-send-resume/) - [Accounting Internship Opportunities](http://machenmcchesney.com/careers/students/) - Contact Us - [Auburn-Opelika Office](http://machenmcchesney.com/contact-us/contact-us-auburn-office/) - [Montgomery Office](http://machenmcchesney.com/contact-us/contact-us-montgomery-office/) # Returning Value Blog ## [Are You a Tax-Favored Real Estate Professional?](https://info.machen.cpa/blog/are-you-a-tax-favored-real-estate-professional) Posted by [Jessica L. Pagan, CPA](https://info.machen.cpa/blog/author/jessica-l-pagan-cpa) on Apr 8, 2025, 9:00:49 AM - [Tweet](https://twitter.com/share) ![Houses 1346495722-1](https://info.machen.cpa/hs-fs/hubfs/Houses%201346495722-1.jpeg?width=1024&height=299&name=Houses%201346495722-1.jpeg)For federal income tax purposes, the general rule is that rental real estate losses are passive activity losses (PALs). An individual taxpayer can generally deduct PALs only to the extent of passive income from other sources, if any. For example, if you have positive taxable income from other rental properties, that generally counts as passive income. You can use PALs to offset passive income from other sources, which amounts to being able to currently deduct them. Unfortunately, many rental property owners have little or no passive income in most years. Excess rental real estate PALs for the year (PALs that you cannot currently deduct because you don’t have enough passive income) are suspended and carried forward to future years. You can deduct suspended PALs when you finally have enough passive income or when you sell the properties that generated the PALs. **Exception for professionals** Thankfully, there’s a big exception to the general rule that you must have positive passive income to currently deduct rental losses. If you qualify for the exception, a rental real estate loss can be classified as a non-passive loss that can usually be deducted currently. This exception allows qualifying individual taxpayers to currently deduct rental losses even if they have no passive income. To be eligible for the real estate professional exception: - You must spend more than 750 hours during the year delivering personal services in real estate activities in which you materially participate and - Those hours must be more than half the time you spend delivering personal services (in other words, working) during the year. If you can clear these hurdles, you qualify as a real estate professional. The next step is determining if you have one or more rental properties in which you materially participate. If you do, losses from those properties are treated as non-passive losses that you can generally deduct in the current year. Here’s how to pass the three easiest material participation tests for a rental real estate activity: 1. Spend more than 500 hours on the activity during the year. 2. Spend more than 100 hours on the activity during the year, and make sure no other individual spends more time than you. 3. Make sure the time you spend on the activity during the year constitutes substantially all the time spent by all individuals. **If you don’t qualify** Obviously, not everyone can pass the tests to be a real estate professional. Thankfully, some other exceptions may potentially allow you to treat rental real estate losses as currently deductible non-passive losses. These include the: **Small landlord exception.** If you qualify for this exception, you can treat up to $25,000 of rental real estate losses as non-passive. You must own at least 10% of the property generating the loss and *actively participate* with respect to that property. Properties owned via limited partnerships don’t qualify for this exception. To pass the active participation test, you don’t need to do anything more than exercise management control over the property in question. This could include approving tenants and leases or authorizing maintenance and repairs. Be aware that this exception is phased out between adjusted gross incomes (AGIs) of $100,000 and $150,000. **Seven-day average rental period exception.** When the average rental period for a property is seven days or less, the activity is treated as a business activity. If you can pass one of the material participation tests, losses from the activity are non-passive. **30-day average rental period exception.** The activity is treated as a business activity when the average rental period for a property is 30 days or less, and significant personal services are provided to customers by or on behalf of you as the property owner. If you can pass one of the material participation tests, losses from the activity are non-passive. **Utilize all tax breaks** As you can see, various taxpayer-friendly rules apply to owners of rental real estate, including the exceptions to the PAL rules covered here. We can help you take advantage of all available rental real estate tax breaks. **For more information about the above due dates or** **other individual tax services, contact Jessica L. Pagan, CPA, by calling (334) 887-7022 or by leaving us a message below.**   Topics: [Individual Tax](https://info.machen.cpa/blog/topic/individual-tax) Search this site on Google Search Google ### Recent Posts ### Subscribe to Blog ### Posts by Category - [Business Tax (356)](https://info.machen.cpa/blog/topic/business-tax) - [Business Advisory (238)](https://info.machen.cpa/blog/topic/business-advisory) - [Payroll, HR & Benefits (124)](https://info.machen.cpa/blog/topic/payroll-hr-benefits) - [Audit & Assurance (113)](https://info.machen.cpa/blog/topic/audit-assurance) - [Accounting & Outsourcing (81)](https://info.machen.cpa/blog/topic/accounting-outsourcing) - [Individual Tax (75)](https://info.machen.cpa/blog/topic/individual-tax) - [Tax Planning (33)](https://info.machen.cpa/blog/topic/tax-planning) - [Tax Updates (25)](https://info.machen.cpa/blog/topic/tax-updates) - [Retirement & Wealth Management Planning (18)](https://info.machen.cpa/blog/topic/retirement-wealth-management-planning) - [Taxation (15)](https://info.machen.cpa/blog/topic/taxation) - [Alerts (13)](https://info.machen.cpa/blog/topic/alerts) - [Business Valuation (11)](https://info.machen.cpa/blog/topic/business-valuation) - [News & Events (11)](https://info.machen.cpa/blog/topic/news-events) - [Tax News (11)](https://info.machen.cpa/blog/topic/tax-news) - [Individual Tax Planning (10)](https://info.machen.cpa/blog/topic/individual-tax-planning) - [Not For Profit (10)](https://info.machen.cpa/blog/topic/not-for-profit) - [Retirement Planning (9)](https://info.machen.cpa/blog/topic/retirement-planning) - [Estate Planning (8)](https://info.machen.cpa/blog/topic/estate-planning) - [Manufacturing Industry Insights (7)](https://info.machen.cpa/blog/topic/manufacturing-industry-insights) - [Individuals (1)](https://info.machen.cpa/blog/topic/individuals) - [Insider (1)](https://info.machen.cpa/blog/topic/insider) - [Professional Standard News (1)](https://info.machen.cpa/blog/topic/professional-standard-news) see all [![Returning\_Value](https://info.machen.cpa/hs-fs/file-2504250850-jpg/Machen-Blog-Image/Returning_Value.jpg)](http://machenmcchesney.com/about-us/mission-and-values/) - [![AICPA](https://machenmcchesney.com/img/logos/aicpa.jpg)](https://www.aicpa-cima.com/) - [![NACVA](https://machenmcchesney.com/img/logos/nacva.jpg)](http://www.nacva.com/) - ![2026 INSIDE Public Accounting Top 400](https://machenmcchesney.com/img/2026-ipa-top-400.jpg) - ![2026 Best of Auburn-Opelika](https://machenmcchesney.com/img/2026-best-of-auburn-opelika.jpg) - [![2025 Best of OA](https://machenmcchesney.com/img/2025-best-of-oa.jpg)](https://oanow.com/exclusive/readerschoice/ballot-2025/) - ![2026 Best of OA Winner](https://machenmcchesney.com/img/2026-best-of-oa-winner.jpg) - [![2025 Accounting Today Regional Leaders](https://machenmcchesney.com/img/2025-accounting-today-regional-leaders.jpg)](https://www.accountingtoday.com/) - [![ClearlyRated Best of Accounting](https://machenmcchesney.com/img/2024-best-of-accounting.jpg)](https://www.clearlyrated.com/accounting) - [![ClearlyRated Best of Accounting Employee](https://machenmcchesney.com/img/2024-best-of-accounting-employee.jpg)](https://www.clearlyrated.com/accounting) 1820 East University Drive, Auburn, AL 36830 | Tel: (334) 887-7022 | Fax: (334) 887-7221 1761 Taliaferro Trail, Montgomery, AL 36117 | Tel: (334) 244-8900 | Fax: (334) 364-0927 † This is not a CPA firm. \* Assurance, attest, and audit services provided by Frazier & Deeter, LLC. “Frazier & Deeter” is the brand name under which Frazier & Deeter, LLC\* and Frazier & Deeter Advisory, LLC† and its subsidiary entities provide professional services. Frazier & Deeter, LLC\* and Frazier & Deeter Advisory, LLC (and its subsidiary entities)† practice as an alternative practice structure in accordance with the AICPA Code of Professional Conduct and applicable law, regulations and professional standards. Frazier & Deeter, LLC\* is a U.S. licensed independent public accounting firm that provides attest services to its clients. Frazier & Deeter Advisory, LLC† and its subsidiary entities provide tax and business consulting services to their clients. Frazier & Deeter Advisory, LLC† and its subsidiary entities are not licensed U.S. CPA firms. - [LinkedIn](https://www.linkedin.com/company/675439?trk=tyah&trkInfo=idx%3A1-1-1%2CtarId%3A1424436970395%2Ctas%3Amachen+mcchesney) - [Facebook](https://www.facebook.com/machenmcchesney) - [Google](https://plus.google.com/101356546927388458481) - [Twitter](https://twitter.com/machenmcchesney) [Powered by Strategic 7 Marketing](https://strategicseven.com)