James R. Kay,
Helping you keep more of what you earn !
What is a Real Estate Professional?
The term "Real Estate Professional" was coined by the IRS to describe someone who spends over half of their time working in real estate businesses. You must meet three tests to qualify for this designation--explained later.
Keep in mind as you read these questions and answers that there is a difference between real estate businesses and rental real estate. Rental real estate is only one of many activities that are considered real estate businesses.
What are real estate businesses?
Real estate businesses include development, construction, acquisition, conversion, rental, management, leasing, and brokerage, but not investing.
Why would I want to be Real Estate Professional?
If you qualify as a Real Estate Professional, your Rental Real Estate losses will be considered non-passive. In other words, your losses will be deductible without limitation against others types of income, including W-2 income.
How do I qualify myself as a Real Estate Professional?
You must meet three tests.
First, more than 50% of your personal services in all of your businesses must be performed in real estate businesses in which you materially participate.
For example, you work 1,000 hours during the year as an employee at a retail store. You also work 1,100 hours during the year managing and maintaining your rental properties. You would meet this test because 1,100 hours represents 52% of your personal services during the year. Since you worked over 500 hours on your rental properties you are also considered a material participant.
This test applies to one person--do not include your spouse's personal services.
Second, you must work more than 750 hours a year in your real estate businesses in which you materially participate.
For example, if you have a full-time job and only devote 600 hours during the year managing your rental properties you would not qualify. You would qualify as a material participant but that's not enough to meet this test.
This test applies to one person. Do not include your spouse's hours.
Third, you must materially participate in your rental real estate activities. You may (and many times must) elect to group all of your rental real estate activities together in order to meet this test.
For example, you have 10 properties and spend about 150 hours on each property during the year. You would not meet this test unless you elected to group all of your properties into a single real estate activity.
You may include your spouse's hours to meet test #3.
How do I meet the Material Participation requirement?
There are seven possibilities or seven tests that would allow you to be called a material participant. If you meet one of the tests then you are a material participant. However, to qualify as a real estate professional you almost always have to satisfy the first of the seven tests which is...work more than 500 hours during the year in the business or activity.
Caution - Content on this page is general in nature. More specific rules and limitations may apply to your situation. Always seek the advice of a tax professional before making important financial decisions.