Qualifying for Real Estate Professional Status — Need Guidance

[Ying Tang]

Hi BP Community,

I’m looking for some insight on qualifying for Real Estate Professional (REP) status and would love your input.

1. I’m the owner and president of a business that’s completely unrelated to real estate, and I’m the only employee. Thanks to systems I’ve built, the business only requires about 2 hours of my time per week, yet it generates enough profit to cover a high W-2 salary and K-1 income that I issue to myself.
2. I’ve been using that income to invest in real estate. I got my real estate salesperson license for the purpose of investing (not to serve clients). My time is spent analyzing deals daily, touring properties, negotiating purchases, working with contractors during renovations, etc. Once the property is stabilized, I hand it over to a friend’s property management company—I don’t manage any rentals myself.
3. The majority of my time is spent on real estate activities. Given that my non-RE business still generates substantial income (but only takes up ~2 hours/week), can I still qualify for REP status as long as I keep accurate time logs?
4. Lastly, does anyone have an Excel or Google Sheets template they use to track hours for REP purposes? I’d really appreciate it!

Thanks in advance for your advice!

[Amanda Breck]

The IRS is definitely skeptical when someone with a W-2 tries to claim real estate professional status. They are usually mutually exclusive, but not necessarily so. You will have to keep very detailed records of your real estate activity and be prepared to make a defense to the IRS. Make sure you are very familiar with the rules and guidelines! You qualified as a real estate professional for the year if you meet both of the following requirements:

1. More than half of the personal services you performed in all trades or businesses during the tax year were performed in real property trades or businesses in which you materially participated.

2. You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated.

There are generally 7 tests for material participation per IRS Publication 925. Clients I work with most often fall under the first four. Keeping a copy of IRS Publication 925 handy could be helpful!