One of the most misunderstood areas of real estate is the real estate professional (REP) designation. The REP designation is an exception of a general rule. The general rule is that all trades or businesses where the owner does not materially participate AND ALL rental real estate is passive.
 
This is under Regulation 469 which is designed to alleviate tax shelters. Rental real estate can create large tax shelters simply because of accelerated depreciation which if not categorized as passive could offset income from other non-passive sources.  For example, a doctor who owns rental property and shows a $50,000 loss on that property simply because of depreciation could reduce his wages from his practice by $50,000. That is a tax shelter and any activity put in place without economic substance solely to avoid taxes is prohibited.  Please click on the attached file to continue reading....