How many doors/units before qualifying for REPS?

Question

Good morning,

I am new to the real estate game, looking for our first fourplex now, just got pre-approved. Background: employed (w-2) as a physician, wife is a stay at home mom, also very interested in real estate and is going to manage/operate our rentals. Question: how many doors before she can qualify as a real estate professional? I understand the material participation as well as the hours requirement. I guess my question is at what point is it reasonable to claim REPS? She has a background in construction and wants to do make-readies and small renovations herself (I know, she’s a freaking boss and I totally married up). Thanks for your insight!

Joe Splitrock · Answer

There is no set number. She should keep time logs tracking all her hours spent. She will need to log 750 hours, which is 14 hours per week working 52 weeks a year. That is an average of 2 hours every day or if you consider it only weekdays and 50 weeks a year, it is 3 hours a day. I have 13 properties and even doing leasing, management and turn over improvements, I don't meet that threshold. People fudge/lie about this, but the IRS understands what is reasonable and without time logs you can't prove anything. IRS doesn't need to prove you are wrong, you need to prove you are right.

On the time log, state start and stop time, with detail of work performed. You can't claim any time prior to putting your first rental in service. Prior to renting a property, you are not "in the business". Real estate education doesn't count.

If I had to guess, I would say managing 30-40 doors is probably where you could hit the 750 hour threshold, assuming you are also doing some rehab or other time consuming activities.

My advice is have her start keeping a time log after acquiring the first property and see how it goes. Another option is she could get her real estate license and act as a part time agent. That would help finding deals and make it easier to hit the time threshold.

Basit Siddiqi · Answer

@David RamirezThere is no set amount of houses.You can have 100 houses but not have real estate professional status if you have a PM that does 100 of the functions.You can also have a few amount of properties if you spend a lot of time on them.Self-managing, buying properties that require a lot of rehab and conducting short-term rentals often require more hours.

Eamonn McElroy · Answer

If it is your tax return's only profession and only source of income, the minimum annual hours may not apply.

The
 750 hours annually is used by the IRS in cases where real estate is NOT
 the only source of income on a tax return, to avoid fraud.

Just to clarify for future readers, this statement is not correct.  The RE pro two-pronged test is codified and there is no interplay with other income outside of real estate.  It is completely possible that a taxpayer may not be a real estate pro even if their only activity and source of income is real estate if they fail the 750 hour prong.  Particularly possible if the day-to-day is managed by a PM.

Drew Sygit · Answer

If it is your tax return's only profession and only source of income, the minimum annual hours may not apply.

The 750 hours annually is used by the IRS in cases where real estate is NOT the only source of income on a tax return, to avoid fraud.

Ashish Acharya · Answer

Here is the case of the doctor's whose wife qualified as REP: I think it was 4 unit apartment too.

In the case Birdsong, the 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 limitations on the house they materially participate.

It shows that with property and diligent planning, you can use the rental loss. We know most investors are in the same situation as described below. Make sure to take notes on 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

Eamonn McElroy · Answer

There's no rule of thumb here as facts and circumstances can and do heavily vary.  I've seen individuals fail to meet REP with 10 properties.  I've seen others meet it with only 2 or 3.

What matters is iron clad documentation to support the position, and an advisor that can help you navigate those waters and elections.  A mistake I frequently see DIYers make when just starting out is a grouping election when there is no need to.

A good tax advisor can help avoid those mistakes.  If you intend to go it alone, a lot of independent reading and research is required.  Both the IRS Pubs and google are good places to start.

How many doors/units before qualifying for REPS?

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