For years, owners of rental properties that show a tax loss have had to contend with the tax law's "passive loss" limitations. With limited exceptions, real estate rental losses may be used only to reduce passive income - the rental losses are not currently deductible against non-passive income, such as salary. Now, owners of real estate rental properties that show a profit also face a potential tax headache. In addition to regular taxes, their profits could be subject to the 3.8% surtax on net investment income first introduced in 2013. A Break for Real Estate Professionals Taxpayers who can demonstrate that they "materially participate" in their real estate rental activities as "real estate professionals" may be able to avoid both the passive loss limitations and the 3.8% surtax on rental income. However, the requirements are stringent. Very generally, a real estate professional spends more hours working on real-estaterelated trade or business activities during the year than working in non-real-estate trades or businesses. Additionally, the time spent on the real estate activities must total more than 750 hours during the year. Material participation means regular, continuous, and substantial participation. IRS regulations contain seven tests for establishing material participation. Each rental property is separately evaluated for material participation unless the taxpayer makes an election to treat all rental real estate activities as one activity. To avoid the 3.8% surtax, a real estate professional must also establish that his or her rental income was derived in the ordinary course of a trade or business. The IRS will presume this was the case if the taxpayer devotes more than 500 hours per year or in five of the last ten years - to each real estate rental activity or to all real estate rental activities viewed as a group .