Acquisition time for RE Professional Status

[Arsalan Augend]

I know acquisition time or commute time do not count for 500 hours material participation in rental properties but couldn’t find any regulation saying they don’t count for that 750 hours total RE involvement. if that time applies, how to document it ?

I am oral surgeon actively purchasing properties and am trying to get RE professional status for my wife. She is searching and analyzing all available listings every day. Does that time count ? How to document it ? Taking screenshots of analytics or listings ? How about commute time to visit the properties?

Any shared experience highly appreciated.

[Ashish Acharya]

Originally posted by @Arsalan Augend:

I know acquisition time or commute time do not count for 500 hours material participation in rental properties but couldn’t find any regulation saying they don’t count for that 750 hours total RE involvement. if that time applies, how to document it ?

I am oral surgeon actively purchasing properties and am trying to get RE professional status for my wife. She is searching and analyzing all available listings every day. Does that time count ? How to document it ? Taking screenshots of analytics or listings ? How about commute time to visit the properties?

Any shared experience highly appreciated.

Commuting to the rental property might count if your residence is the principal place of business. And it is a little more complicated than that and you need to know other wholistic rules to conclude. 

If you keep a time-stamped notes, that should be more than enough to document the time. Please see below. the care relates to you. 

This might be helpful: 

If a taxpayer's capacity in a given activity is more akin to that of an investor, then the activity cannot be treated as participation for purposes of deducting passive losses unless the taxpayer is involved in day-to-day management.

Sec. 1.469-5T(f)(2)(ii)(A), Temporary Income Tax Regs., supra. Section 1.469-5T(f)(2)(ii)(B), Temporary Income Tax Regs., supra, defines investor activities as follows:

(B) Work done in individual's capacity as an investor. For purposes of this paragraph (f)(2)(ii), work done by an individual in the individual's capacity as an investor in an activity 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. Mrs. Antonyshyn secured the services of three different management companies to handle the day-to-day operations of most of her and Mr.  Antonyshyn's residential rental properties during the years at issue. 

Court case:

Recently, in the case Birdsong, doctor's wife demonstrated that she actively and extensively managed their rental properties and was therefore a “real estate professional”.

RE professional is not limited by passive loss limitation on the house they materially participate.

It shows that with property and diligent planning, you can use the rental loss. We know most of investor in the same situation as described below. Make sure to take notes how to document your hours and types of activities.

“The husband worked full-time as an emergency physician, while his wife divides her time between caring for their children and managing their rental properties. In 2014, wife was the sole party actively involved in the day-to-day management of their rental properties. The activities of wife with respect to the rental properties included, among other things, cleaning common areas, collecting coins from washing machines, performing repairs at the properties, communicating with tenants, collecting and depositing rent, maintaining insurance policies, purchasing materials for the properties, as needed, paying bills and keeping books and records for tax accounting purposes. Occasionally, wife hired a contractor to perform tasks she could not complete herself. When wife hired a contractor, she spent considerable time researching and contacting contractors, obtaining price quotes and supervising repairs. Wife's property management duties also included inspecting units, preparing units for rental, advertising vacant units, screening potential tenants, showing the units and processing rental applications.

Wife produced two spreadsheets detailing her rental management activities. The first spreadsheet reflected that wife logged 844.75 hours managing the rental properties in 2014, and the second spreadsheet showed a total of 1,136.25 hours. The second spreadsheet included previously omitted tasks such as investor hours and driving time between the rental properties and the hardware store and other locations pertinent to the management of the units. The case specifically stated that the taxpayers used wife's calendar and receipts to reconstruct the time and entries on both spreadsheets for the first half of 2014, and that for the second half of 2014, the time entries came from a contemporaneous log wife maintained on her phone on which she entered the date, location, time and description of each task she performed. Wife also supplied receipts and invoices substantiating the hours she logged” - Source Checkpoint.

The court first noted that a taxpayer may establish hours of participation in a real property trade or business by any reasonable means. The court further stated that this does not require contemporaneous daily reports and that reasonable means includes “appointment books, calendars, or narrative summaries” that identify the services performed and “the approximate number of hours spent performing such services.”Nevertheless, the court also stated that it was not required to accept a postevent ballpark guestimate or the unverified, undocumented testimony of taxpayers.

Note: The court also did not count any hours for seminars because it found the taxpayers did not present evidence to show how the seminars related to the residential rental activities