Published by AE Tax Advisors Team • 2026-06-08

Passive to Active Reclassification Unlocks $89,000 in Deductions

The Client

Jordan and Tamika Williams owned seven rental properties in Birmingham, Alabama generating combined rental losses of $112,000 per year (after depreciation). Jordan worked part-time as a consultant earning $75,000, while Tamika managed the rental portfolio full-time.

The Problem

Their prior CPA treated all rental losses as passive, suspending $112,000 per year. Over four years, $448,000 in losses had accumulated as suspended passive losses. However, Tamika spent over 1,200 hours per year managing the properties and had no other employment -- making her eligible for Real Estate Professional Status (REPS) under IRC Section 469(c)(7).

Our Strategy

We documented Tamika's hours spent on rental activities using contemporaneous time logs, establishing her REPS qualification. We prepared amended returns for the three most recent years to reclassify the rental activity from passive to active, releasing the suspended losses. We also ensured proper grouping of properties under the election to treat all rental activities as a single activity.

The Results

The reclassification released $336,000 in suspended losses across three amended years, producing $89,000 in total tax refunds. Going forward, the Williams family can deduct their annual $112,000 in rental losses against Jordan's consulting income, saving approximately $30,000 per year.

Key Takeaway

Taxpayers with a spouse who manages rental properties full-time may qualify for Real Estate Professional Status, which reclassifies rental losses from passive to active and allows them to offset W-2 and other income without limitation.