Real Estate Professional Tax Status - Help!

[Petur Karlsson]

Hello everyone!

I'm knee deep in an lengthy rehab on my first BRRRR deal ever, in Sellersville, Bucks County PA.

The project started in late February, DAYS before the pandemic came around. Talk about good timing... Anyways, I accounted for the unforeseen and thankfully am still within budget, although the rehab is taking several more months than originally anticipated and the workload is massive to say the least. New floors (except 1st floor hardwood), attic conversion to master bed/master bad, new windows/doors, new bathroom, new kitchen, plaster removal, framing and drywall, painting, exterior brick repairs and soffit covering, new plumbing, new electric, THE WHOLE GAMBIT. Welcome to the university of real estate investing, I say.

I am putting in a lot of my own sweat equity and that, alongside with business meetings with the wife, networking with other investors and all the communications with my real estate agent, insurance agent, lenders, contractor and subcontractors, are accumulating to the point where I can likely achieve the 750 hours of real estate work required to designate myself as a "real estate professional" on our next year's tax return. This status allows me to write off all the real estate losses against our household income taxes. Terrific!

THE MOST IMPORTANT THING about claiming this status is to keep a detailed and contemporaneous log of all your activities, with supporting information like pictures, screenshots, etc. There are other things to consider, like NOT having any other work that exceeds the amount of time you spend on real estate activity (sorry investors with full time jobs, I'm lucky to be a stay at home dad). You also need to have at least 500 of those hours DIRECTLY related to the properties themselves. Please consult with a real estate CPA if you're planning on doing this, there are several other points to consider as well. (I also recommend The Book On Advanced Tax Strategies, found in the BP library) 

If you are a real estate professional already or have experience filing as one, HOW DO YOU LOG YOUR ACTIVITIES?

I use google calendar. I log everything same day (most of the time), try to be as detailed as possible and start each log stating participants and the entry's duration, and usually set my real estate home office address or the rehab property address as the location of the activity, unless it's a trip to the bank, Home Depot or an event/meeting elsewhere. 

Would you deem this to be an acceptable approach or should I convert to something else? I like this format and also print out every entry to store them in a physical folder. Both the virtual and physical log can be referenced in case I get audited by the IRS.

Another question I have is, WHAT ACTIVITY CAN BE COUNTED TOWARDS THE 750 HOURS REQUIRED? 

I consider the following: -Searching for properties, -analyzing properties, -working on properties, -marketing properties, -screening & communicating with tenants, agent/lender/insurance/contractor communications, -work on the real estate business itself like writing a business plan, contingency plan or company policy, -errands pertaining to the real estate like picking up materials or taking checks to the bank, -business meetings with my contractor and my wife who is obviously involved, -networking with other investors or attending real estate events. I also deem the writing of this post to be a real estate activity, correct me if I'm wrong?

A big question I have is: Do webinars count towards real estate activity? What about reading real estate books? HECK, WHAT ABOUT ENGAGING THE BP FORUMS? If anyone can answer these question, it would be massively helpful to me and other rookie investors who are looking to acquire this status. I've read a whole bunch of the BP books and spent quite a lot of time doing online research, but am too scared to involve those hours for eligibility.

If anyone wants to make any remarks or ask any questions pertaining to the real estate professional status, I welcome you to join the discussion! 

Thanks in advance for reading and/or responding, everyone.

[Natalie Kolodij]

Hey peter I actually have a log available for this that Mimic's the IRS's audit guide they use when looking at hours. 

I won'tspam here on the forums but if you clicked through the links on my bigger pockets profile you'd find both that free log and also a you tube video on this topic that should both be really helpful to you. 

A lot of tax cases are lost when people are still working a full time job and trying to claim this- the more than any other activity comes into play. So if you work full time 2000 hours annually- you need at least 2001 in REI. It's hard with 1 house.

Only activities directly related to your property/ activity count. 

Your work on the house, repairing it, managing it as a rental, doing monthly financials, collecting rent ect. 

Networking, Meetings, ect don't count. Nor does time spent looking for other properties, researching ect.