Gary - I believe what you are asking is if your wife qualifies to be a "Real Estate Professional". Like @Benjamin Aaker mentioned above, this is a tax term that the IRS uses. To qualify as a real estate professional for tax purposes, you don’t have to own or work for real estate businesses or have a real estate license. Instead, you must pass three tests. If your spouse meets all three tests, having them qualify as a real estate professional makes your rental losses fully deductible on a jointly filed tax return.
1. More than 50% test.
You must have spent more than 50% of your working time during the tax year performing personal services for a real property trade or business.
The tax code defines a real property trade or business activity as “any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.”
2. 750 Hour Test
You must spend more than 750 hours participating in real estate business activities during the tax year. This can include the time spent acquiring or improving rental properties, managing rental property portfolios, and advertising for tenants.
Just keep in mind that you can’t combine time spent by both spouses to meet the 750-hour test.
3. Material Participation Test
Finally, you must materially participate in each real estate business or property. To have your activity qualify as material participation, you must meet one of the following tests:
-Work more than 500 hours in the activity (a married couple can count the involvement of both spouses to meet this test)
-Do substantially all the work in the activity
-Work more than 100 hours in the activity, and no one else worked more than the taxpayer (including non-owners or employees)
-The activity is a significant participation activity and your total time in all significant participation activities exceeds 500 hours
-You materially participated in the activity in any five of the prior ten years
-You materially participated in a personal service activity for any three prior years
-Based on all facts and circumstances, you participate for more than 100 hours in the activity on a regular, continuous or substantial basis during the year
Practically speaking, this means you’re doing the work on your rental properties rather than hiring a property manager. The three tests outlined above are applied annually, so you may qualify as a real estate professional in one year and not in other tax years.
It is also very important to document material participation.
To meet the requirements of real estate professional status, it’s essential to keep detailed records of activities and time spent working on the properties so you can verify your real estate professional status in the event the IRS decides to audit your return.
For example, you may keep a contemporaneous appointment book, calendar, or narrative summary of the time spent performing real estate activities. Your documentation doesn’t have to be contemporaneous but trying to recreate records after the fact can be challenging. In fact, numerous Tax Court cases have found in favor of the IRS when a taxpayer can’t document enough hours spent providing personal services to their rental real estate activities.
Generally, material participation is determined separately for each rental property. However, if you prefer to treat all rental property interests as a single rental real estate activity, you can make an election to do so. That election is binding unless you later revoke it and covers all future purchases.
Because of the 750-hour requirement, it’s unlikely that you’ll be able to qualify as a real estate professional if you own only one or two properties (unless one of them is undergoing significant renovations). However, if you own several properties and manage them yourself, it’s well worth documenting the time you spend working on and managing them.
I hope this helps and good luck!
