Real Estate Professional Qualifications

We receive many inquiries throughout the year from individuals who want to know if they can deduct real estate losses on their tax returns. If an individual is new to the world of managing, renting or maintaining properties, either as an individual or through a business, they may be unfamiliar with the requirements necessary to take advantage of deductions for improvements or report losses associated with their properties. There are specific eligibility requirements established by the IRS which determine if you qualify as a Real Estate Professional, which is necessary in order to take certain deductions on your tax return.

Real Estate Professional Qualifications

To qualify as a real estate professional, you must:  

1. Spend more than half your time working in real property trades or businesses in which you materially participate, AND
2. Spend more than 750 hours working in real property trades or businesses in which you materially participate.

Eligibility Requirements

To meet the eligibility requirements to deduct real estate rental losses, real estate professionals must also materially participate in the rental activity(ies).  Therefore, qualifying as a real estate professional does not automatically mean that a taxpayer is eligible to deduct rental losses. 

To materially participate, you must meet one of the following “material participation” tests for losses of a particular rental activity treated as non-passive:

1. More than 500 hours of participation in the activity
2. More than 100 hours of participation in the activity and no one else participates as much
3. Your participation is “substantially all” of the active participation in the activity
4. The activity is a significant participation activity (SPA) and your aggregate participation in all SPAs exceeds 500 hours
5. You have materially participated in the rental activity in any 5 of the last 10 years
6. For a personal service activity, you materially participated in any 3 prior taxable years
7. Based on all the facts and circumstances, your participation in the activity was material because it was regular, continuous, and substantial.

If you have spent more than half of your time working in real property trades or businesses which you materially participate, spent more than 750 hours working in real property trades or businesses which you materially participate and can proof as lease one of the seven items listed in the above list, then you are able to qualify as a real estate professional.

IRS Audits

The IRS has made this a point of emphasis to verify this information during audits of real estate professionals.

When this is not your full-time job, you may want to use an activity log to track your rental real estate activity. Keeping a log will assist you in substantiating your eligibility as a Real Estate Professional.  This log should be completed annually to maintain contemporaneous evidence that you meet the eligibility requirements. 

Passive or Non-passive Income from Rental Properties

Under Internal Revenue Code Section 469, the treatment of a taxpayer’s losses from rental real estate may be treated as passive or non-passive, depending on the taxpayer’s level of participation. While there are several tests that must be met to treat losses from rental real estate as non-passive, we recommend you consult your tax advisor regarding your specific facts and circumstances to determine the proper treatment of your rental real estate activity losses.

As always, should you have questions on this or other matters affecting you or your business, please call 215.675.8364 or email us to speak with a CPA today.

DISCLAIMER: All communications by Wouch, Maloney & Co., LLP intend to provide general information, as of the date of the communication, and may reference information from reputable sources. Although our firm has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided. Please be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed.