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Income comes in all different types, and each type is taxed differently. For practice owners who also own the real estate that they operate out of, there is a tax election to group rental and business income to treat it as one type.

Typically, people who aren’t real estate professionals are faced with an additional tax of 3.8% when it comes to rental income. Once this election is made, practice owners can avoid that additional surtax on their rental income.

This election is extremely beneficial to practice owners, because in some cases it allows them to reduce their overall pass-through income from business activities. In the case of rental losses, those losses can be netted against business income to reduce overall income.  This type of treatment is not normally allowed, but since the election was made the income can be treated as the same type and net together to either increase or decrease overall taxable income.

For clients where cost segregation studies have been performed, these losses can have a material effect on the amount of taxable pass-through income you report; We have seen losses reduce income in excess of $80,000. If you haven’t read our post about cost segregation studies, be sure to check that one out!

If the election is missed, in most cases those losses are unable to provide any benefit to the owners, nor can it be used to offset income.

If you are getting ready to purchase a piece of commercial real estate, make sure this election is not missed!