Go to Jeff Salisbury LWGate Home Page.From: ldavis@ix.netcom.com (Lynn R Davis)
Subject: "Active Participation" in Rental Real Estate Activities
Date: Sun, 16 Aug 1998 01:58:27 -0500 (CDT)
Previous Article (by Author): Re: Asset Allocation , part 2 jeff@scrooge.csd.sdl.usu.edu (Jeff Salisbury)
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Your described two management scenarios and asked what standards applied to meeting the "active participation" test for deducting rental real estate losses. The second scenario you describe does not seem to me as a layman to meet the criteria that I would consider "active management". The first scenario sounds as if you are paying them for a marketing service, while retaining management control yourself. Whether or not that service is worth the price they are asking is up to you to determine, but I do not think it would bring into question your "active management" any more than hiring a painter rather than painting the rooms yourself. But I am not the one to tell you how far you can go in between these two alternatives. The 1997 IRS instructions for Schedule E on page E-3, near the top of the third column says: "Active Participation. You can meet the active participation requirement without regular, continous and substantial involvement in real estate activities. (LRD: I think this is IRS speak for you don't have to do this full time.) But you must have participated in making management decisions or arranging for other to provide services (such as repairs) in a significant and bona fide sense. Such management decisions inlcude: * Approving new tenants. * Deciding on rental terms. * Approving capital or repair expenditures. * Other similar decisions. You are not considered to actively participate if, at any time druing the tax year, your interest (including your spouse's interest) in the activity was less than 10% by value of all interests in the activity." Since the problem seems to be the current tenants, I would ask you why you believe that the management company is less likely to have a repeat experience than you are. There are books with good advice and good forms for applications, and places you can inexpensively get credit checks done. Also, management companies tend to want to use long-term leases (minimum one year). My belief is that in most cases that protects the renter more than the landlord, and that month to month leases are best. Anyway, before I wander too far beyond the scope of your original question, let me simply wish you the best of luck. Lynn Davis Fremont CA You wrote: >------------------------------ > >Date: Mon, 10 Aug 1998 09:54:29 -0700 >From: Mike Broadhurst <specpub@annex.com> >Subject: Re: Income reduction from rental property > > However, I've been considering hiring a management >firm to handle the property once the eviction is complete. > >The company offers varying degrees of management. Under one option, they >will advertise and screen prospective tenants and negotiate the lease. I, >however, retain full responsibility for choosing the tenant and setting the >rent, and dealing with the tenants for the duration of the lease. > >Under another option, the management firm handles everything -- from >screening, leasing, handling maintenance problems, to collecting rents and >paying the mortgage, homeowners association, etc. -- and just send to me >any money that's left over (there won't be any). They'll even guarantee to >pay the monthly amount due me, even if the tenant defaults. > - -
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