Section 469(c)(7): Rental Losses

From TaxAlmanac

RENTAL LOSSES ALLOWED FOR REAL ESTATE PROFESSIONALS:

Generally, passive activity losses are suspended until the year in which you have enough passive income to offset it against (or until you sell it).

HOWEVER, if you are a "real estate professional" (1), you can deduct your passive rental losses against ANY income, including non-passive income, provided you "materially participated" (2) in your rental real estate activity.

  (1) You are a "real estate professional" if:
      a. You performed more than 750 hours in real property trades
         or businesses, AND
      b. You performed more than half of all your personal services
         in real property trades or businesses in which you
         materially participated.  [IRC Section 469(c)(7)(B)]

  (2) For you to have "materially participated" in it, you must meet
      AT LEAST ONE of the following requirements:
         a. You worked on it more than 500 hours. OR,
         b. You worked on it more than 100 hours and no one else
            worked on it more than you did. OR,
         c. You did substantially ALL of the work on it. OR,...
         d. [See Regulation 1.469-5T for further details.]

This link should help: Real Estate Professional