 The rental of real estate is, by definition, considered a passive activity. Passive income is taxed like other income, and no special reporting is required. Passive losses, however, are typically limited and allowed only to the extent of passive income. That means if you have passive losses, but no passive income, the loss is not allowed.
Because of these passive loss rules, multiple years of rental losses may catch the attention of the IRS. That doesn’t mean the losses aren’t allowed, but if you are reporting losses, make sure you are claiming them appropriately. There are exceptions to the limitations, and rental real estate losses can be allowed.  We've all heard the quote, "Love what you do, and you'll never work a day in your life." Can you really take something you enjoy and turn it into a business?
We all have hobbies. Sometimes we might be able to make money with our hobby. You must report any income you make from a hobby, and any related expenses are deductible. However, so called "hobby losses" are not deductible. Expenses up to your total income are fine, but no more. What's worse, those deductible expenses are reported on Schedule A as miscellaneous itemized expenses, meaning they are deductible only to the extent they exceed 2% of your adjusted gross income. To be able to deduct expenses beyond your income, you have to be able to demonstrate you are not just reporting a hobby, but that you are actually running a business.  One of the questions we get asked most frequently is about how long documents should be kept. Here are some general guidelines based on our experience and federal statutes of limitations for income tax purposes. Your state may have longer statutes, so use this list as the guide, not the rule.
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