Real estate professional status

If you own a rental property, there are three different ways to treat your rental losses depending on your condition. One of them is “Real Estate Professional”.

First, let’s dispense with a myth: Real estate professional status doesn’t mean you have to have a real estate license. Rather, it is a designation that you earn by meeting certain specific requirements. The first requirement is that you dedicate more than 750 hours to real estate businesses or businesses in which you materially participate. The second requirement is that you spend more time on your business or real estate deal than on ALL OTHER exchanges or businesses combined. Time spent as an employee in real estate activities is counted only if you are a greater than 5% owner in that business. If you qualify as a real estate professional, you can deduct all current year rental real estate losses against other income without limitation.

What is a real estate trade or business? A real estate trade or business is defined as ANY real estate development, remodeling, construction, reconstruction, acquisition, conversion, rental, operation, management, lease, or trade or brokerage business.

You have to meet the above requirements every year. So you could be a real estate professional one year, but not the next. Only one spouse must meet the requirements for a married couple to take advantage of the benefits of real estate professional status.

The 750 hour test must be met for each activity. So, for example, let’s say you have three rental properties. The general rule of thumb is that you should spend at least 750 hours in activities related to EACH of those three properties. Fortunately, there is an exception to this rule. If you choose to aggregate all of your real estate rental activities into one activity, you only have to meet the 750 hour requirement once per fiscal year.

What types of activities qualify as real estate professional activities? Activities such as:

– Search for possible rental properties.

– Attend real estate seminars or read real estate books.

– Meeting with real estate agents and viewing of properties.

– Meeting with mortgage brokers regarding obtaining property loans.

– Travel time to and from seminars and searches for your property.

– Prepare your accounting and tax information for your rental properties.

– Time spent buying or selling properties (i.e. signing closing documents)

– Study and review of financial reports (investor type)

– Preparation of summaries or analysis for personal use (Investor type)

– Financial monitoring or operation in non-managerial capacity (investor type)

An important note for the investor-type activities mentioned above is that these activities can only be counted as real estate professional time if you are involved in the day-to-day operations or management of the activity for which you perform those tasks. Essentially, this means that if you have an independent property manager and your only real estate business is your rental properties, you probably don’t qualify as a real estate professional.

The extent of an individual’s participation in an activity can be established by any reasonable means. No contemporaneous daily weather reports, records, or similar documents are required if the extent of such involvement can be established by other reasonable means. The required documentation includes the identification of the services provided during a period of time and the approximate number of hours dedicated to the provision of those services during that period, based on appointment books, calendars or narrative statements. Documentation is the key when claiming the status of a real estate professional. Most taxpayers who lose in tax courts lose due to poor documentation. Although documentation through reasonable means is quite vague, tax regulations are clear that post-event “rough estimates” are not allowed and will not be upheld in tax courts.

Real estate professional status is such an important designation for a high-income real estate investor that we highly recommend that you spend time with your tax advisor to determine if you can become a real estate professional and how you can deduct all of your rental losses.

Are you ready to permanently reduce your taxes?

The warmest greetings,

Thomas