Am I a real estate professional for tax purposes ?

Question

I am beginning to prepare for filing my taxes. I have not kept a good record of my hours. I have a full time job, but I feel like I've easily surpassed the 750 hour mark on my rentals and I probably have more like 1000 hours into the business every year. I currently have four rentals. I self manage, self repair. I find renters. I clean afterwards. I handle evictions. I do everything.

What are your thoughts ?

Thanks in advance.

Brit

What are your thoughts ?

Thanks in advance.

Brit

Brandon Hall · Answer

Chris Soignier

Did she keep a log of her time? Does she have receipts that prove she was where she was when she claims she was there?

She needs to have material participation in real estate activities. This can include sourcing deals if documented well.

Jon Holdman · Answer

@Brit Foshee I doubt you'll make a case that you're a RE Professional with only four rentals.  The IRS audit guidelines (which they have online, though I don't have a link handy) specifically addresses rentals.  It notes that rentals are generally a very passive activity, even if the landlord manages them on their own.  I've found that to be the case, too.  Even doing my own repairs and management I think I realistically spend less than 20 hours per rental per year.  1000 hours a year equates to 20 hours each and every week all year long.  Even if you're "doing everything" I can't see how you could possibly consume that much time with four units.  The IRS won't, either.

The other half of this requirement is you must spend more time on real estate than anything else.  If you have a full time job, 2080 hours per year, the requirement is you would have to spend 2081 hours doing real estate.

@Troy Fisher income produced by real estate or other sources is irrelevant for qualifying for "real estate professional" status for taxes.

Cal C. · Answer

I think it will be next to impossible to prove to the IRS's satisfaction that you worked more on RE than you did in your regular job without having extensive records to prove it.  Time logs, driving logs, and supply receipts are the type of things I mean.

If your regular job is a 40 hour a week job that is nearly 2,000 hours per year.  2080 hours less (holidays and vacation days *8).

Brandon Hall · Answer

@Brit Foshee

There are three levels of participation in the IRS's eyes.

The first level of participation is simply "passive" participation. If you do not materially participate in the activity, then you are not an active participant and the carried forward passive losses can only off-set passive income.

The second level of participation is "active" participation. If you were an active participant, then you receive a special allowance up to $25,000 in which you can off-set passive losses against your ordinary income. You are an active participant in a rental real estate activity if you and/or your spouse owned at least 10% of the rental property and you made management decisions or arranged for others to provide services. "Management Decisions" consist of approving of new tenants, deciding on lease terms, approving expenditures, hiring contractors, etc.

The real question regarding active participation is whether or not your Modified Adjusted Gross Income (MAGI), which is reported on your Form 1040, disqualifies you for the special allowance. If married filing jointly, you may use the full $25,000 allowance if your MAGI is $100k or less, meaning if you have a $25,000 rental loss in an activity which you actively participated in, you can use the entire loss to offset your ordinary income. The allowance begins to phase out once your MAGI goes over $100k and is completely eliminated once your MAGI hits $150k.

If you were not an active participant in the activity in prior years, but this year the activity becomes active because you materially participate, then suspended passive losses can be used to offset income from the new active activity, but it must be the same activity as when it was a passive activity. And again, if your MAGI is above $150k, you won't be able to deduct the losses anyway.

The third level of participation is being classified as a real estate professional. If you are classified as a real estate professional, all real estate losses can be used to off-set your ordinary income. To qualify, 51% of the personal services you performed in all trades or businesses during the tax year must be performed in real property trades or businesses in which you materially participated AND you performed more than 750 hours of services during the tax year in real property trades or business in which you materially participated.

However, if you are working in the real estate field (i.e. as a broker) and working for someone else (i.e. you are an employee), you do not get to count these hours or services toward the two criteria stated above unless you own at least 5% equity of the business you work for.

Michael Plaks · Answer

Yes

Cliff T. · Answer

Bumping this back up. Do hours spent as a real estate agent count towards the Professional status 750 hours requirement?

Paul Sundin · Answer

Unfortunately you probably do not qualify.  One of the qualifications is that 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.

My guess is that you may work 40 hours a week in your day job, so you will have to work 41 hours in your real estate activities.  Sounds like tax season hours to me.

Chris Soignier · Answer

Thanks, @Brandon Hall.

Chris Soignier · Answer

My wife doesn't have a paying job, but easily devoted 750 hours last year networking w/ fellow investors, chasing prospective deals (we invested in 2 MF deals last year, another one early in '15 for which the due diligence was performed in '14, and contracted for 2 SFH's which failed due diligence), performing due diligence, and educating herself on real estate.    Does that count?

Todd Campbell · Answer

@Brandon Hall

Great info Brandon. Thank you!!

Am I a real estate professional for tax purposes ?

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