Real Estate Professional Status Under IRS Attack
Real Estate Professional Status Under IRS Attack
© 2008 Diane Kennedy, CPA/Tax Strategist
The Real Estate Professional status has been a great loophole and, actually still is, if you follow the rules. But the IRS has found a few people who were taking advantage of the rules and so they’re on the hunt for anyone using this designation.
Here’s what the rules were three years ago: If you made under $100,000 adjusted gross income, you can deduct $25,000 in real estate losses. If you make over $150,000, you can’t deduct anything. In between, the deductible amount phases out. The exception is if you’re a real estate professional. Thousands of people then took the steps to legally qualify as a real estate professional. And now, it looks like the IRS is challenging that definition.
A primary target is the real estate agent herself. One of our USTaxAid/TaxLoopholes community members reports that he’s currently under audit for taking the real estate professional deduction on his joint return. His wife is a real estate agent, does not have any other job and reports the commissions she receives through her legitimate business. Because she claimed the real estate professional status, they then took 100% of their real estate losses against their other income.
The IRS auditor has taken the position during the audit that because one of the requirements is that she is “brokering” deals, she isn’t qualified because she’s not a licensed broker.
Apparently there have been a few cases of IRS auditors in California taking this position. I know of two cases that are planning to fight it in Tax Court. If they win, we’ll have a precedent that might stop the IRS tactics. But, if they lose, everyone who has claimed the Real Estate Professional loophole based on being a real estate agent needs to be prepared for an audit.
The timing for this aggressive IRS audit crackdown couldn’t be worse. At a time of dropping home values, tightened credit and a general malaise in the housing market, an aggressive IRS audit specifically targetting the people who are suffering the most in this economic time can’t be good for anyone. But the IRS has their job too and that’s to raise tax revenue.
One more horror story from my USTaxAid/TaxLoopholes forum:
“We just got hammered by the new IRS restrictions for being a Real Estate Professional. The IRS has just finished an audit for my wife and me for the 2004,2005,2006 tax years. We have several rental properties in Missouri. We have been using a CPA as a tax advisor over the last several years. I have felt that he is well qualified with real estate business in order to to help us understand and document the activities that would qualify my wife as a real estate professional. I have a full time job, and we had declared my wife to be a real estate professional. This was her only occupation. Since our joint income has been more than $150,000, we believed that having her qualify as a Real Estate Professional would enable us to take depreciation and other passive losses every year as they have occurred on our rental properties. However, as a result of the audit, the IRS has decided to disqualify her as a Real Estate Professional.
According to the IRS audit team (yes, more than one auditor was involved), over the last three years, the IRS has been researching the topic of Real Estate Professional for quite a while and there is now a very detailed internal IRS publication used by auditors to determine Real Estate Professional status and has now very detailed information about what activities qualify as valid activities for a Real Estate Professional. The IRS audit team used these new standards to review every hour of activity that my wife documented for each year as a Real Estate Professional. It is my perspective that the IRS is really getting on the warpath about Real Estate Professional status. We were very diligent in keeping track of my wife’s activities, recording on a daily calendar every activity that she did in support of our real estate LLC. The IRS went through this diary very carefully, and, according to their new Real Estate Professional guidelines, disallowed many of her hours. They disallowed enough hours so that she no longer had 750 hours of qualified activities each year. As a result, many of our passive losses in each tax year were disallowed.
Some of the activities that were disallowed were:
1. Researching the market for new properties (!!!)
2. Overseeing repairs done by a contracting company.
3. For those properties where we used a property management company, any coordination with the property management company was not an allowable activity.
The activities that were now categorized as unqualified activities have really surprised both our CPA and us, especially that you could not include hours that were spent in search of new real estate investments.
The final ruling of the audit expressly said that in order to qualify for Real Estate Professional status, that someone needed to put in 750 hours in directly and actively managing and maintaining their own properties and tenants, and that it did not include hours spent in working through a property management company. In my opinion, these new standards for qualified activities of a Real Estate Professional means that a Real Estate Professional would have to own quite a few properties. Now, we will be able to claim most of our passive losses for a property in the tax year that we sell that property. However, In the meantime, we had to pay tens of thousands of dollars in back taxes, interest, and penalties for the tax years of 2004-2006.”
Tags: Diane Kennedy • irs • loopholes • real estate
87 Responses to “Real Estate Professional Status Under IRS Attack”
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How about auditing the CEO/CFO etc…crooks who stole billions of our tax money;; where is the IRS then? How about auditing the Citibank million dollar tax payer airplane? How about auditing the Wells Fargo billionaire welfare bailout?? Where’s the IRS then….go after the little guy. No rights.
Funny how they only go after the little people trying to pay their bills and have some rental?
It is embarrassing to be an American.
Why is it legal to apply “new IRS restrictions” on the real estate professional status in 2008-9 on taxes filed in past years , when the restrictions were not in effect until now, or clearly stated in the tax law. Laws in effect, as well as their interpretation, in 2005 should apply to those taxes filed in 2005. You can’t write the rule today and apply them backwards. It is illegal as well as wrong to expect folks to know and anticipate future interpretations.
The problem is that tax law is comprised of so many pieces. There is the IRS Code that says what to do in very general terms, then the IRS Regs tell us how to do it and Rev Rulings, Procedures, PLRs and court cases round it out.
The IRS, I believe, is trying to force the hand of taxpayers who took this deduction and make them force the issue in court. The IRS is kind of in a “no lose” situation. They have lawyers on staff to fight the issue and if they make a taxpayer loose, they have precedent.
Is it fair? No. I don’t think it is either. Figure as much as $50,000 to fight a lawsuit.
SO, I AM STAY AT HOME MOM, MANAGE TWO RENTAL PROPERTIES WHICH I OWN. I DO NOT HAVE A MANAGEMENT COMPANY OR ANOTHER JOB. THIS YEAR I CAN ACCOUNT FOR ABOUT 750 HOURS ON BOTH PROPERTIES IE PAYING MORTGAGE, TALKING TO TENANTS, VISING THE PROPERTIES, PAINTING, CLEANING ETC…I AM NOT A LICENSED PROFESSIONAL.. WILL I HAVE PROBLEMS IF I CLAIM THE REAL ESTATE PRO STATUS..sam
sam, please come over to http://www.TaxLoopholes.com. I have a number of blog posts over there on the real estate professional status. You may be able to qualify, but this is definitely something you don’t want to make a mistake on. The IRS is really on the attack in this area.
I’ve been engaged in taxations for lengthier then I care to acknowledge, both on the individual side (all my working life history!!) and from a legal stand since passing the bar and pursuing tax law. I’ve furnished a lot of advice and corrected a lot of wrongs, and I must say that what you’ve put up makes utter sense. Please continue the good work – the more people know the better they’ll be equipped to deal with the tax man, and that’s what it’s all about.
Diane,
I purchased 10 properties in the Go Zone in 2007. As I understand it, research does not qualify as active participation, but “acquisition” itself qualifies as active participation. After purchase I used a property management company for 6 of the properties. Does the use of property management NEGATE the hours I put in acquiring the property? Also, I run and manage the HOA for these properties – oversee management of the entire development. Does that management qualify as active?
The property mgmt company won’t negate any hours. The challenge that you’d get in an IRS audit is whether you managing the property management company is active enough. If you had enough hours from other activities – finding the property, fixing it up, etc..
Tricky on the HOA management. Hours count if you own 5% or more of a company. But if you work at a non-profit, then you can’t own it, so the hours won’t count.
We have benefited from the Real Estate Professional exception now for years and so far without any problems.
A common theme I find running through most of these cases is the owners really didn’t manage the property or the hours reported are absurd. Take a Denver physician and his wife who claimed to be full time managing their two ski condos and writing down time spent driving to the mountains on ski weekends.
Another common one is like the gentleman above. If you have a management company interviewing tenants and leasing units and you only own a few how does that occupy most your time? Especially if they were rented for most of the year without too much turn-over? Isn’t there a smell test on what is reasonable regardless of what you “documented” on a piece of paper?
Those cases are easy to understand why they were audited. What about owners with multiple properties they really actively manage? Do you need to own more than 5 or 8 or 10 before it seems reasonable you spent 750 hours on them?
I wish someone would investigate the true guidelines and focus on discussing the ability to use the loophole for those of us who own and manage rental properties.
In my case I have a full-time job with an active income over $150,000. My wife really does manage the rental properties from home without having any other job so we deduct those “passive” losses against my active income.
Does anyone know what objective criteria the internal IRS audit manual uses to trigger an audit? Number of houses, minimum percent of ownership and other specifics would really help everyone forllowing this issue.
Thanks
This is a very interesting blog and i appreciate everyones inputs. I started buying, renovating, and renting out real estate this year and I have quite a few units operational already – many more coming for 2010. I spend the vast majority of my time doing the real estate activities mentioned above, but I take a full salary from my wife’s advertising agency for “consulting” work. Quite frankly, after what i have read, I am afraid to declare myself a real estate professional even though i could easily document the 750 hours. It may be difficult to show that my “consulting” is less than 50% of my time, since we do not track our hours for the advertising agency. The hassle of the audit and possibility for all the back payment, interest and penalties is terrorizing. This is nuts. Why does this country want to beat up on the little guys? Isn’t there enough big guys out there to beat up on?
Does anyone know if real estate training/education related time can count toward a portion of the 750 hours?
Bryan, the training and education is something that the IRS is systematically throwing out when they calculate the hours. I don’t believe that anyone has challenged the IRS on this and won.
Diane,
I am a CPA,MST who does a great deal of work with real estate investors. (Let’s disregard the hassle I am going through with the first time homebuyers credit.) I have several clients that clearly (at least appear) to qualify for real estate professional status NOW and in this market. Several have prior year passive activity loss carryovers related to real estate as a result of AGI limitations. You have clearly done quite a bit of research in this area. What is your thought on converting prior year carryovers to non passive? It is quite possible that they may have qualified in prior years but did not have a tax preparer that understood the law. Can I do a retro amendment or is there a “timely filed” requirement? Real estate taxation is a specialty area! Most investors do not understand that a “storefront” tax service is NOT going to get them all of their benefits!!!
I’d appreciate any off the cuff input you may have. Thank you!
Lisa Martin
Farmington Hills, MI
Hi Lisa
The Real Estate Professional (REP) status does not have a time requirement. The other part of this, though, the material participation requirement of 500 hours per property applies. If the client instead wanted to aggregate the properties, that election must be filed with the original return.
Hope that helps! Diane
Diane:
I have a client who consists of two 50% partners that rent 2 properties. They have each been claiming the Real Estate Professional status for years, but may be under audit soon. About 65% of their rental income is drawn from a self-rental (to another business that they oare involved in). The rest of the income is from a 3rd party renter. There is no turnover in tenants.
Also, even though one of the partners may really qualify as a real estate professional, the other one will not, (based on the fact that he works greater than 50% at the other business that they own)
Question #1: Does the self-rental “not count” in the determinatin of the 750 hours, etc, criteria? Or can we see it as a legitimate tenant?
Question #2: If one of the partners is found NOT to be a real estate professial, will only his share of the proceeds be at risk of tax/penalties, or will the entire partnership be?
Thanks!, Phil
I’ll just assume that this is an LLC and you have two members. There would be a question as to whether the LLC is manager-managed or member-managed, but setting that question aside, the bottom line is the LLC is simply a pass-through entity.
Each member gets a K-1 and for one the loss may be deductible and for another it might not be. So, if one has to suspend the loss, it doesn’t mean that the other one will have to. The real estate professional designation is an individual test, not a business test.
The other issue is whether there is 500 hours of material participation per property. If not, and there was no aggregation election made, there could be an additional issue.
Is there any update on the cases that were to be heard in court?
Melvin,
The IRS pretty much lost all around on the cases. Real estate agents are considered real estate professionals, provided they meet all the other requirements. But I’m not sure how good the training on this issue is. I just heard from an IRS agent based in AZ who said that ONLY real estate agents could be real estate professionals now. And that’s not right either. But I haven’t heard that he’s prevailed in any audits. (You can often get crazy auditor rulings overturned internally through the appeals process, when you get a more experienced agent looking at the facts.)
Diane,
I am a RE Agent and my prior CPA didn’t advise me of the RE Pro advantages. So I filed an amended return for 2 previous years. I met the active requirement and had over 750 hrs for the properties.
1) Since I didn’t file the desire to aggregate my RE properties into one on my ORIGINAL return 2 years ago, does that preclude me from being able to aggregate my properties?
2) When I filed my amended return my CPA was not aware of the need to file a form with the amended return showing the desire to aggregate my RE properties. Am I out of luck?
3) I have researched all the IRS regs and I do not see a “form” to aggregate your properties. How do you do that on your taxes?
I am in the middle of an audit that is driving me crazy as the original auditor refused my deductions and would never give me a reason for that decision. We have appealed this to the next level but I don’t know what to expect as my amendment triggered the audit.
Thanks for all your posts and help!!
Jeff, I hope you’re getting some good help on the audit.
My guess is that they are challenging your real estate professional status, and thus you’re not able to take the real estate loss against other income. But without actually talking to the auditor or seeing the papework, it’s hard to guess exactly what is happening.
If you did not aggregate the properties, you will probably get denied on this. The aggregation is a written election that you need to make at the time you file.
If you do get denied the deductions in the audit, and you haven’t yet filed your 2009 return, you may be able to take it in 2009, do the aggregation and pick up the losses now.
At this point, the audit needs to be the biggest focus.
In the future, I suggest you work with a CPA who is a specialist in this area.
Diane,
You said “The Real Estate Professional (REP) status does not have a time requirement. The other part of this, though, the material participation requirement of 500 hours per property applies. If the client instead wanted to aggregate the properties, that election must be filed with the original return.”
What about those of us that prepared our own taxes and e-filed and were not able to send in the election to combine properties with the e-file?
Hi, I currently own 4 homes, one of which is classified as a rental, the others are our primary, summer, and extra (in laws use). I wanted to know if the 750 hours can be spread throughout the properties or only to the rentals.
Also can supervising construction and renovation count towards those hours.
Also does my time spent commuting count. I live in new york and have been going to and from new jersey at least twice a week to meet with workers.
It really does sound like you were abusing the definition to me. The IRS isn’t as stupid as some would hope.
If you only own a couple properties out of state and hire a management company to manage the units, how can you possibly claim it is a 750 hour per year job? Nobody believes that is a fulltime activity.
Too many people were using this loophole to write-off trips to their timeshares and vacation condos being managed by professionals. As someone who does manage my own dozen properties I appreciate the ability to write-off the full depreciation.
Shawn, I’m sorry for the misunderstanding. The Real Estate Professional status does have a time consideration – there must be a minimum of 750 hours per year and at least as many hours as are spent in any other trade or business.
If you did not make the election to aggregate the properties, you’re pretty much out of luck. The e-file does not work in all circumstances, as you did find out. Make sure you file it this next year.
Leah,
You can not include hours that you spent on your personal residence. The 500 hours of material participation and 750 hours (or more) for Real Estate Professional all must be related to BUSINESS, not your personal home.
Hi Diane,
I have been audited and my deduction of my real estate losses against my wife’s income is being disallowed based on the auditor’s decision a real estate appraiser is not a real estate professional. Otherwise I meet all the time requirements and the material participation requirements for my properties. Are you aware of any challenges to the IRS by real estate appraisers to determine whether they qualify as real estate professionals?
I’m sorry to hear that Thomas. I’m not aware of that argument before. You may want to contact other appraisers or visit some appraisal forums to hear if it has happened to anyone else.
One other point, some times the auditor may disallow the deduction because of material participation or due to the fact that the ownership was not proven. Also, you would need to meet both the minimum 750 hours and more hours in real estate activities than any other trade or business test.
Hi Diane,
I am being audited for my rental property loss deductions. The number of “500″ hours per property is being quoted here. My research pertaining to the definition of material participation is telling me that 100 hours per property is the key number. I am reading something wrong? Also, if I had chosen to group my three properties would it be just one single 100 hour requirement spent to materially participate in all three?
I am being audited for being a real estate professional as well. I have 3 properties and spend 50%+ of my time on managing, renovating, fixing the properties. I do most of the work myself or work as the general contractor and hire and work with the contractor when appropriate. I am working on documenting my hours together to show 750 hours of direct manual labor.
Two questions: 1) what is a reasonable amount of time to allow for ongoing admin duties like screening tenants, collecting rents, security deposits etc? 2) Can they really disallow my time if I act as the general contractor – hire, supervise and work with contractors?
It seems unfair that they would disallow time to supervise contractors (I have to hire licensed plumbers and electricians at times) because I have to meet them at the building, move or clear out items, go over the job and make sure they are doing it right and or check the work before paying them.
It is pretty clear to me that I am doing the general contracting and some of the labor – most of my major reno work is done at 25-40% of the going rate.
Any advice is appreicated.
Bobbi says:
“I am being audited for my rental property loss deductions. The number of “500″ hours per property is being quoted here. My research pertaining to the definition of material participation is telling me that 100 hours per property is the key number. I am reading something wrong? Also, if I had chosen to group my three properties would it be just one single 100 hour requirement spent to materially participate in all three?”
Thanks for the question – this is a common misunderstanding. The 100 hours refers to active participation. 500 hours is material. You need active participation if you have a business loss or make less then $100K and want to take the up to $25K real estate loss.
David says: “I am being audited for being a real estate professional as well. I have 3 properties and spend 50%+ of my time on managing, renovating, fixing the properties. I do most of the work myself or work as the general contractor and hire and work with the contractor when appropriate. I am working on documenting my hours together to show 750 hours of direct manual labor.
Two questions: 1) what is a reasonable amount of time to allow for ongoing admin duties like screening tenants, collecting rents, security deposits etc? 2) Can they really disallow my time if I act as the general contractor – hire, supervise and work with contractors?
It seems unfair that they would disallow time to supervise contractors (I have to hire licensed plumbers and electricians at times) because I have to meet them at the building, move or clear out items, go over the job and make sure they are doing it right and or check the work before paying them.
It is pretty clear to me that I am doing the general contracting and some of the labor – most of my major reno work is done at 25-40% of the going rate. ”
If your income is over $150K and you’re using the Real Estate Professional status to get your losses, make sure you also can prove material participation on the properties. People get hung up on the REP status and forget about the 2nd part. If you have more than one property, you’ll need 500 hours per property or have done an aggregation election. Also, if you have these in an LP, you could be in trouble if your interest is mainly as a limited partner.
But those aside, if the issue really is just the REP status, make sure your time sheets show more than 750 hours becuase they are definitely going to disallow something. If you can show proof that you did work directly on the property as a contractor, handyman, whatever that will go a long way.
Please help. I am not able to sleep or eat. I just received an IRS audit letter for 2008 and 2009. They want to discuss mainly my rental properties income and expenses. I now they want to discuss with me more than that…You know what I mean. I have filed my returns as REP and I believe I deserve the classification as I spend a lot of time managing my 4 properties located in the same area (condo). I can document the 750 hours outside my day job (consulting). I am also the HOA President where I give them at lest 2 hours a day: signing checks for workers, vendors, reviewing bids, approving bids, talking to HOA CPAs, lawyers, reviewing the books and many many other things.
I haven’t slept for 3 days now and I am worried that I will be stuck with at least a bill of 60k after said and done. I will be devastated. Please help.
John,
You need to get a tax pro helping you immediately. If you’d like a referral to one of the experts we work with, please get hold of our office: Richard at USTaxAid.com (substitute @ for at)
Hi Diane-
I was doing some extensive research for a few days now regarding this REP status for our LLC tax, and I have 3 questions:
1) We have one 8-unit apartment complex, is that sufficient for the 750-hour requirement? In other words, is it going to raise red flags for the IRS, since I’ve read so many horror stories with people with multiple properties getting audited anyways (or maybe they’re condo owners instead of apt).
2) I am one of the owners of the LLC; however, I read that “By definition, if you hold property in a limited partnership as a limited partner, you do not materially participate. This area is being hit hard, and the number of audits of limited partnerships has increased.” Do I need to modify the LLC so I’m not one of the owners or I’m okay?
3) We don’t want any chance of getting audited- from what I’ve been reading, is this REP a risky route? Or maybe we should split the loss between the LLC members?
Thank you in advance for your help!!
Hi Patricia – glad you found this almost 3 year old blog entry and that it was helpful.
There are two parts to successfully taking a REP exemption: Proving you are a REP (that’s the 750 and more hours in RE activities than any other trade or business) PLUS materially participate in your property.
The apt complex could very qualify you for the 2nd part (materially participate in the property), but doesn’t necessarily mean you also meet the REP qualifications.
On the LLC – depending on how you hold your interest. Is it a manager-managed or member-managed LLC? There is a lot to consider with the deduction. It’s not quite as straight-forward as we all wish it was.
I need a good attorney in Huntsville, Alabama who can represent me during an appeal. I won the audit for 2004, 2005, 2006 claiming real estate professional. I was audited for 2007, 2008, 2009 and the IRS claims I am no longer a real estate professional. Different auditor. I have good records, logs, etc. just different auditor. I can’t afford to spend thousands on a lawyer.HELP.
Melissa, if this is the IRS, then it is federal, not state based. That means an IRS rep in any state can help you. You do need an attorney if you’re going to tax court, but it you’re still in the audit or just got the results and want to talk to the appeals division w/n the IRS, then you can use a CPA as well.
Drop my husband Richard a note and he can give you a couple of leads Richard AT USTaxAid.com (substitute the AT for @)
Hi very informative site. Thank you very much for your guidance.
I have a 3 unit apt building and am “in contract” to purchase an additional 4-unit property (I will owner-ocuppy one of the 4 units and have an undivided 75% ownership interest in the overall property with a 25% passive family member partner). I am single and have never claimed REP status due to my current full time “day” job (where I earn income well above $150K threshold – so have not been able to take any RE losses). I will end that non-real estate job at the end of this month. I am interested in obtaining REP status – as my primary occupation for the next several years will be the design, permitting and extensive remodel / redevelopment and ultimate condo conversion of the new 4 unit building (using a General Contractor, structural engineer, draftmans but being very involved the architectural design, sourcing and contracting of sub-contractors, construction oversight, etc.).
If my only occupation as of March 31 2011 is this work (and managing the existing 3 unit where there is no property manager and I already do virtually all the handyman work, painting, tenant management, etc.) and assuming I qualify in terms of the 700 hours (and file to “aggregate” the two properties), my question is if I no longer have any active income (since my day job is going away) – though I will have $150k+ of w-2 for 2011 with my Q1 2011 work and severance payments – but will likely only have passive annual income therafter – which will also likely be well in excess off $150k in, dividends (both ordinary and full taxable dividends from REIT, Prefrreds and BDC stocks) and interest income and occasional stock cap gains (both short and long term), can I offset any or all of those passive income amounts against my RE losses and if so, is it dependent on my qualifying as REP status – or are there differnet rules between active and passive income in this area?
p.s, as I currently have only one rental property is there any issue of filing to aggregate these two properties for tax year 2011 when I close on the new 4 unit bldg – and are there any issues disadvantages in aggregating that I should consider in advance?
Many thanks
sorry should read 750 hours above instead of 700
Also I will still be renting out the other non-owner occupied units in the 4 unit building while I design the rehab, secure permits and financing for the remodel (likely a 1 year plus timeframe . . . before any actual remodeling will begin).
I have a full time job. However the IRS is saying i’m not a Real Estate Professional although I can easily account for 750 hours a year by owning 30 properties and managing them myself. How many hours does it take to qualify. I have heard 750 and more than you work your full-time job.
I received my real estate salesperson license in September 2010. Prior to getting my license, I was actively looking for investment properties and spent more than 750 hours including studying and preparing for the exam. However, I spent less than 750 hours from September through December of 2010 after I received my license. Can I claim as a fulltime real estate professional on my income tax return for 2010?
Hi Diane – I’m so glad I found this forum on Real Estate Professional. I have a 10-unit apartment rental property and my business is incorporated as as S- corporation with my husband and I being the 50-50 shareholders. I have a couple questions:
1. Since my rental property is set up as an S-corporation and that I materially participated in the rental property, will my wife and I be qualified as a real estate professionals?
2. My wife and I both have a full time job as computer programmers, will this affect our real estate professional status (if we quality)?
3. If I qualify as real estate professional in 2010 tax year, will I be able to deduct prior year’s passive losses against my non-passive income in 2010?
Thank you so much for help!
I am in business with a partner as a contractor- remodeling, painting and landscaping, and I own 9 rental properties that I manage and maintain. The contracting takes about 1200 hours a year, and the rental properties are about 800 hours a year. Am I considered a real estate professional? If it helps to have more info- I’m a general partner and we file a 1065 for the business. Half of my hours in that business, about 600, are spent on landscaping and the other half, also about 600, on remodeling.
Thank you for your help
Hi – thanks for all of your comments. Looks like the hottest blog entry right now is almost 3 years old!
Ron said: “I have a full time job. However the IRS is saying i’m not a Real Estate Professional although I can easily account for 750 hours a year by owning 30 properties and managing them myself. How many hours does it take to qualify. I have heard 750 and more than you work your full-time job.”
There are two standards to taking the real estate professional exemptions: (1) You are a real estate professional and (2) You materially participate to the tune of 500 hours per property per year.
You need both to qualify.
(1) A REP means you work more hours in real estate activities then any other job and that you have at least 750 hours per year.
(2) Material participation may be what is causing you your problem. 500 hours * 30 properties = 15,000 hours per year INSANE! You need to make an election to aggregate your properties so you can instead meet just one 500 hour requirement.
WARNING: Do not enter into the aggregation election without considering what happens when you sell. You can run into tax issues if you sell at a loss.
Steven says: ” I received my real estate salesperson license in September 2010. Prior to getting my license, I was actively looking for investment properties and spent more than 750 hours including studying and preparing for the exam. However, I spent less than 750 hours from September through December of 2010 after I received my license. Can I claim as a fulltime real estate professional on my income tax return for 2010?”
The license has nothing to do with the REP designation. The question is whether you were actively working as a real estate professional. Studying doesn’t count. In TOTAl did you spend more than 750 hours? Is this more then you spent at any other trade or business?
And please see my message above for my additional advice for Ron.
John says: ” I am in business with a partner as a contractor- remodeling, painting and landscaping, and I own 9 rental properties that I manage and maintain. The contracting takes about 1200 hours a year, and the rental properties are about 800 hours a year. Am I considered a real estate professional? If it helps to have more info- I’m a general partner and we file a 1065 for the business. Half of my hours in that business, about 600, are spent on landscaping and the other half, also about 600, on remodeling.
Thank you for your help”
Without knowing any other information about your business and other business activities, it definitely sounds like you have active real estate activities. You do need to own more than 5% of the business and you need to be a general partner (which it sounds like you are).
Remember you also need to meet the 500 hour requirement mentioned above.
And by the way, consider moving your business to an LLC or S Corp – being a general partner in your own name puts all your other assets at risk.
Hi Diane,
I have several rental properties and wanted to know if Im a 5% owner in an S Corp and employ myself to manage the properties using the S Corp can claim REP to offset my other fulltime job?
Neither my husband or myself is a “RE” professionals (Can’t find a definition of one)but we have 4 rental properties that my husband manages works on etc. He has taken the deduction for many years assuming he was putting in 750 hours. When he started to really put down what he did and for what amount of time, he realized there was no way that was going to work. We realize that we are going to fail the test during the audit and will probably owe a lot of money. My question is: Where do we turn to get someone to look at our taxes and see if there are other areas that may mitigate the problem. My husband has always done our taxes himself trying to read the tax code and I am wondering about other possible mistakes like should we have income averaged or other things. We just want to have our ducks in a row before the audit. Advice is appreciated!