If my wife were to become a real estate agent, would the passive loss limitation exception for real estate agents apply to properties that we already jointly own? It is my understanding that we can only use passive losses to offset passive gains if we make more than $150k per year (the complete phase out amount).
First, you should note that your passive losses, while limited, are not “lost.” Suspended losses are carried forward until you either 1) use them to offset passive gains or 2) sell the property.
2nd, “real estate agent” isn’t the criteria. To be a “real estate professional” for tax purposes you must spend more than 750 hours AND more than 50% of your time materially participating in real property trades or businesses. Whether you are an agent or not doesn’t matter. You must meet the material participation and time requirements each year to be a REP for that year.
So, if you’re a full time realtor and work >750 hours a year, then yes.
If you’re a part time realtor, and you spend 20 hours a week working with your real estate businesses and 20 hours a week at your “day job” not in real estate (ie: 50% of your time) AND >750 hours of real estate during the year, then yes.
So it will depend on your specific facts and circumstances - not whether you are an agent.
Real estate activities are treated as non-passive for real estate professionals. The the 25k passive loss limitation for real estate doesn’t apply and the $150k AGI phaseout do not apply (losses are not limited).
There are some special rules for how to treat your suspended losses for “formerly passive activities.” See a good CPA.