Last year, George and Louse purchased several rental units near the university hoping to benefit from their expected appreciation and cash flow. Because George and Louise both have full-time jobs, they are unable to spend time managing the facilities. Consequently, they contracted with a well-regarded property manager to attract renters, collect the rents, and respond to service calls. After the close of the year, the property manager provided George and Louise with an accounting of the revenues and expenses related to the operation of the units. Though the results showed a positive cash flow, the impact of depreciation and mortgage interest expenses led to a net tax loss.

• Not wanting to forgo claiming a loss on their income tax return, George ad Louise chose to claim the loss under the real estate rental activity exception. Have George and Louise acted properly?