Income and Expenses

When you rent out two units in a duplex or multifamily property, the IRS does not automatically treat them as a single rental activity. How you report them on Schedule E, whether you list them separately, and whether you make a grouping election under section 469 all have real consequences for your passive loss position, your depreciation tracking, and your recordkeeping. This article walks through the mechanics so you can make informed decisions rather than just copying what a neighbor did.

Real estate professional status under IRC §469(c)(7) unlocks the ability to deduct rental losses against ordinary income - but the 750-hour threshold is only as strong as the records behind it. The IRS does not accept self-serving testimony alone, and Tax Court has repeatedly rejected REP claims where the log was the only evidence offered. The burden of proof sits entirely with the taxpayer, and that burden is heavier than most people expect. This article covers what a defensible hour log actually needs to contain, the specific patterns that trigger examiner skepticism, and what good documentation looks like in practice.

Under IRC §469(c)(7), taxpayers who qualify as real estate professionals can treat rental losses as non-passive, potentially deducting them against wages, business income, and other ordinary income. Qualifying is harder than it sounds: you must clear a strict two-part hour test, and you must also materially participate in your rental activities. The IRS scrutinizes these claims closely, and poor recordkeeping is the most common reason courts and examiners reject them. This article walks through the qualification rules, the material participation requirement, what documentation actually holds up, and the audit risk factors every taxpayer should understand before claiming this status.

When you pay a business or rental cost, tax law forces you to decide whether to deduct it immediately or capitalize it and recover the cost over time through depreciation or amortization. A deductible (revenue) expense is ordinary, recurring, and does not add lasting value beyond the current year. A capital expenditure, governed primarily by IRC Section 263, must be capitalized because it acquires, produces, or improves a long-lived asset—or provides a benefit that extends substantially beyond the tax year. Getting the classification right matters because the timing of your deduction can shift significantly, and misclassifying a capital item as a current expense is a common audit trigger.