If your spouse becomes a real estate professional by IRS standards, then it removes the income limits and loss limits to the real estate passive loss.
Kelly would you mind elaborating on this?
Sure. (please note I'm not a tax professional so check this stuff with your CPA and/or tax attorney)
From
https://www.irs.gov/publications/p527/ch03.html on passive loss limits:
Exception for Rental Real Estate With Active Participation
If you or your spouse actively participated in a passive rental real estate activity, you
may be able to deduct up to $25,000 of loss from the activity from your nonpassive income. This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities. Similarly, you may be able to offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception.
From
http://www.bankrate.com/finance/taxes/earnings-too-high-claim-passive-losses.aspx on the phase out:
Taxpayers whose modified adjusted gross income, or MAGI, is less than $100,000 can claim up to $25,000 in rental losses. The $25,000 cap is
reduced $1 for every $2 a taxpayer’s MAGI exceeds $100,000.
From a nifty power point on irs.gov
https://www.irs.gov/pub/irs-utl/33-Real%20Estate%20Professionals.pdf on real estate professionals:
Real Estate Professional Qualification
• Material participation in each specific
rental
• Material participation in separate Real
Property Trade or business
• 50% rule
• 750 hours rule
• 5% ownership ruleReal Estate Professional Exception• The Special $25,000 Allowance Limitation
does not apply: can have more than
$25,000 of active real estate losses
• $100,000 Modified AGI test does not apply
• $100,000-$150,000 phase-out rules do not
apply
What this means is that to be a real estate professional you must spend at least 750 hours a year doing real estate things approved by the IRS (property hunting does NOT count). You must spend at least 50% of your professional life on real estate things. Which this means in actuality is that you can not have an unrelated full time job and be a real estate professional. There have been a bunch of tax court cases around this and everyone who tries to fudge this loses. See that same powerpoint on some details of what activities are included by the IRS as real estate things. You can be a real estate agent but it is not a requirement.