Real Estate Professional Status

[Julio Gonzalez]

What is Real Estate Professional Status?

Section 469(c)(7) provides an exception that allows qualifying taxpayers to treat rental real estate activities as nonpassive, enabling them to deduct losses against other types of income. To qualify, taxpayers must meet specific criteria demonstrating that they are real estate professionals who materially participate in their rental activities.

How to Navigate the Rules:

Step 1: Identify your real property trades or businesses

Here is a list of activities that are considered to be a real property trade or business:

• Redevelopment
• Leasing
• Conversion
• Construction
• Real property development
• Reconstruction
• Operation
• Rental
• Brokerage
• Management
• Acquisition

If you participate in multiple of these activities, you may be able to combine them making it easier to meet the material participation hour requirements.

Step 2: Demonstrate material participation in real property trades or businesses

There are seven tests to determine if you demonstrate material participation. However, these are the ones most commonly used:

• Five-of-Ten-Year Test: You must have materially participated in the activity for any five of the past ten years.
• 500-Hour Test: You must have materially participated in the activity or activities for 500 hours in the current tax year.

Step 3: Calculation your participation hours

Ensure you are tracking your participation hours. Note that if you are married filing joint, only the spouse who is qualifying for REPS is able to count their hours.

Step 4: Apply the quantitative tests

Per Section 469(c)(7)(B), in order to qualify for REPS, you must meet both of the tests below:

• 750-Hour Test: If you materially participate in a real property trade or business, you must spend 750+ hours during the tax year.
• More Than Half Test: You must spend more than half of your personal service hours in the real property trade or business in which you materially participate.

Step 5: Material participation in rental activities

Just because you qualify for real estate professional status does not mean that your rental activities are automatically considered non-passive. You are also required to materially participate in all of your rental activities. You can make an election (be sure to speak with your CPA about this) to treat all of your rental activities as a single activity.

With careful tax planning, real estate professional status can provide significant tax savings opportunities. Are you utilizing REPS?