Real estate professional qualification

[Lyle Cooper]

The real estate professional rule states:

"A taxpayer will be considered a real estate professional if (1) more than one-half of the total personal services the taxpayer performs in trades or businesses are performed in real property trades or businesses in which the taxpayer materially participates and (2) the taxpayer performs more than 750 hours of services during the tax year in real property trades or businesses in which the taxpayer materially participates. 3"

I spend over 1700 hours a year working on my real estate properties.  The majority of that work is renovation work.  I think I should qualify as a contractor.  I do all the taxes and record keeping (Quickbooks).  I deal with the tenants leases, repairs and other issues.  I spend ALL my time on real estate activities.  Real estate is my sole source of income.  I have no other job.  I do make some money from interest and dividends - but not a lot.

DO I QUALIFY AS A REAL ESTATE PROFESSIONAL IN THE EYES OF THE IRS?

I am a landlord with 2 rental properties. 1 condo and 1-three family house. Both are located in NYC.

I gut renovated my condo and rented it out. I purchased the 3 family house and I am in the process of gutting it out myself.  I have one tenant on the 1st floor of the 3-family house.

Thanks

[Michael Plaks]

@Lyle Cooper

You phrased your question funny: do you qualify as a RE Pro in the eyes of the IRS? Most likely not. The IRS passionately hates this designation, loves to audit tax returns with it (they have a special program targeting it), and during the audits they tend to take aggressive and uninformed positions against it. 

Rephrasing your question: do you qualify in the eyes of the tax law? Possibly yes, based on the limited information that you shared. To confirm this, I would need to discuss it with you in depth. This is not an offer of a free consultation, by the way. I'm just stating that no experienced tax accountant can determine your eligibility conclusively from a brief discussion online.

Before pursuing it, you need to determine whether it's even worth pursuing. How much is it likely to save you if you qualify? Is it worth the hassle and the audit risk? Remember that you do not lose your deductions if you do not claim RE Pro, you simply defer them into the future.

If you decide to take this route, then get a good tax pro on your team and be prepared that you might have to defend your eligibility against an unsympathetic and poorly trained IRS agent. I had many of these fights over 20 years, and it's not a good DIY project. By yourself, you're likely to lose the fight, especially given your shaky situation. Hiring someone like me is pretty expensive.