What Counts as Hours for Real Estate Proffesional Designation?

[Daniel Dietz]

Hello All, 

I have been doing some reading up on how to use 'excessive losses due to depreciation' and of course came across the Real Estate Professional Designation for tax purposes. This is realated to buy-n-hold rentals. 

My understanding is that there are several 'test' to meet this; 1) My non real estate income will always be under 100K (not sure if that matters for this purpose), 2) I have to spend more time doing real estate than what you spend in my 'regular job' 3) I have to put in 750 hours per year, or at least that much in 5 of the previous 10 years. 

My question is what 'activities' count as 'hours spent'? Looking for properties online or driving for dollars? Going to REI meet ups? Meeting with investing partners or potential investing partners? Going to classes, conferences etc...? Listening to podcasts, reading directly related books? I guess what I am wondering about is waht could be called 'soft time' compared to fixing things, doing leases, etc......

And for what it is worth, my partners and I are GREAT at tracking time (we use Google's Toggl app) as that if part of how we split profits for the work we each put into our joint properties. 

As a side note, one ofmy long range goals is to sell properties in my SOLO401K and SDIRA and pull those funds out in largish chunks (say to but a retirement home) that will cause high income for that year, and 'offset' that with new purchases outside of the Self Directed Accounts that I can use Cost Segregation on to have similar Passive Losses to offset that income coming out of the retirement accounts.

Thanks, Dan Dietz

[Ashish Acharya]

Originally posted by @Daniel Dietz:

Hello All, 

I have been doing some reading up on how to use 'excessive losses due to depreciation' and of course came across the Real Estate Professional Designation for tax purposes. This is realated to buy-n-hold rentals. 

My understanding is that there are several 'test' to meet this; 1) My non real estate income will always be under 100K (not sure if that matters for this purpose), 2) I have to spend more time doing real estate than what you spend in my 'regular job' 3) I have to put in 750 hours per year, or at least that much in 5 of the previous 10 years. 

My question is what 'activities' count as 'hours spent'? Looking for properties online or driving for dollars? Going to REI meet ups? Meeting with investing partners or potential investing partners? Going to classes, conferences etc...? Listening to podcasts, reading directly related books? I guess what I am wondering about is waht could be called 'soft time' compared to fixing things, doing leases, etc......

And for what it is worth, my partners and I are GREAT at tracking time (we use Google's Toggl app) as that if part of how we split profits for the work we each put into our joint properties. 

As a side note, one ofmy long range goals is to sell properties in my SOLO401K and SDIRA and pull those funds out in largish chunks (say to but a retirement home) that will cause high income for that year, and 'offset' that with new purchases outside of the Self Directed Accounts that I can use Cost Segregation on to have similar Passive Losses to offset that income coming out of the retirement accounts.

Thanks, Dan Dietz

For purposes of qualifying as a real estate professional, “personal services” means any work performed by an individual in connection with a trade or business, but not any work performed by an individual in the individual’s capacity as an investor.

Work performed by an individual as an investor includes (1) studying and reviewing financial statements or reports on operations of the activity, (2) preparing or compiling summaries or analyses of the finances or operations of the activity for the individual’s own use, and (3) monitoring the finances or operations of the activity in a non-managerial capacity

If you can show that non investor activity is connected with the rentals, you can log it to show that you qualify. 

Also, you have to remember that you have to materially participate(not actively) in the rentals to treat the losses as non passive. Just qualifying as RE pro will not grant you ability to deduct the losses. You might want to google Material participation test. There are 7 tests. 

Also, you can still qualify for the 25k active participation loss allowance on top of Non passive treatment of material participating rentals. 

So, if you have a rental that you don't materially participate, you can use 25k loss exclusion on the loss. And, take the RE pro status to take the losses on the property that you materially participate.