Someone may call themselves a real estate professional, but there is a strict definition of an IRS real estate professional. Why is this important? Well let me explain.
In general, real estate rental activities are considered passive activities even though you may materially participate in them. In this case, you are able to deduct up to $25,000 in passive losses each year and offset other income. But if your income is greater than $100,000 a year there are phase-outs on the deduction. They are completely phased out (suspended) when your modified adjust gross income exceeds $150,000.
However, if you are able to qualify as a real estate professional your rental real estate activities (that you materially participate in) are not considered passive activities. This means that you are able to take these losses to offset other income without the limitations previously discussed.
So how do you qualify as an IRS real estate professional?
In order to qualify you need to meet both of the following requirements:
- More than half of all the personal service hours you perform during the year were performed in real property trades or activities in which you materially participated. What this essentially means is that you must have worked more in your real estate trade activities than you did in any other job.
- You must have performed at least 750 hours of services in your real estate businesses or trades in which you materially participate.
You cannot count any personal services you provided while employed in real property trades or businesses unless you were a 5% owner of your employer. You are generally considered to be a 5% owner if you owned more than 5% of the outstanding stock, outstanding voting stock, or capital or profits interest.
If you are married and file a joint return, you cannot count your spouse’s personal services to determine whether you met these requirements. However, you are able to count your spouse’s participation in a real estate activity in determining if you materially participated. Please realize, each interest you have in a rental real estate activity is considered a separate activity. However, you may choose to treat all interests in rental real estate activities as one activity.
Just a reminder of what constitutes a real property trade or business. A real property trade or business is a trade or business that does any of the following with real property.
- Develops or redevelops it.
- Constructs or reconstructs it.
- Acquires it.
- Converts it.
- Rents or leases it.
- Operates or manages it.
- Brokers it.
IRS Real Estate Professional?
Qualifying as an IRS real estate professional can be tough for some taxpayers. Make sure to discuss your situation with your CPA or tax advisor.