Are there downsides to the real estate professional designation?

By Jason Watson (Google+)

Yes. But the downsides are obscure.

If you have other passive income you might want to keep your rental losses passive to offset this income. For example, you are an investor in an investment partnership that loses money and you have rental properties which make good money. If you consider yourself a real estate professional for your rentals, that income is no longer passive and will now be considered earned income. Your tax deduction from your investment partnership losses will be limited according to passive loss limits when deducted against earned income.

Typically most real estate professionals group their rentals together to eliminate the hourly requirement per property. However, if you had disallowed losses in prior years, you need to unbundle your grouping if you want to deduct those losses in the year of sale or disposal. This is a minor issue, and it requires a bit of mental gymnastics, but it should not dissuade you from electing real estate professional status and grouping your rentals.