Active Vs. Passive Income

If we are buying some multi-unit apartments and re-financing our house to buy them, how will the income be treated?



There will be a mortgage deduction on the personal house I assume and the positive cash flow will be taken as Ordinary income?



How does this passive vs. active income issue relate if we do not have any losses but a positive cash flow?

Comments(7)

  • fbprop25th August, 2005

    The income will be passive income as you noted since it is income from a rental activity. Passive income is not taxed for SE (self employment) tax purposes. Active income is taxed for SE tax.

    Remember that in addition to the typical deductions for expenses such as maintenance, taxes, insurance, etc. you will be able to deduct depreciation from the "positive cash flow".

  • stevedmatt25th August, 2005

    Similar situation:

    There is a stipulation in Pub 925 which says:

    Exceptions. Your activity is not a rental activity if :

    The average period of customer use of the property is 7 days or less.

    If this is the case, what type of activity is this? Is it considered business activity?
    This is especially important to me do to the Modified AGI phase out rule. If this is a business activity, not only would I be able to claim a loss, but there would be no restrictions on the amount of that loss. I am currently limited to the amount of loss I can take do to the phase out rule.

    Thanks for your help, if you can.

  • NewKidinTown226th August, 2005

    Active income, reported on Schedule C and Schedule SE.

  • stevedmatt26th August, 2005

    Thanks NewKid

  • stevedmatt27th August, 2005

    Just want to make sure I have this right.

    Would this be active income that I can take a loss on (I am expecting a loss) including depreciation at my current tax rate?

    When I sell, will my profit from the sale be active income or LT capital gains?

    Thanks again

  • NewKidinTown227th August, 2005

    Quote:Would this be active income that I can take a loss on (I am expecting a loss) including depreciation at my current tax rate?Active income (or loss) on Schedule C. Depreciate structure as business property on 40 year schedule. Depreciate furniture separately on either five or seven year schedule, whichever is appropriate.

    Quote:When I sell, will my profit from the sale be active income or LT capital gains?Capital gain -- long term if holding period is at least one year and a day, otherwise short term gain.

  • stevedmatt27th August, 2005

    Thanks again

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