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Am I Really a Real Estate Pro?

Am I Really a Real Estate Pro?

The IRS may not think so! Who truly qualifies as a Real Estate Professional under the Internal Revenue Code?

The answers may surprise you. It goes beyond simply having a real estate license, or buying and selling property.

Rental Property activities are normally considered passive unless you materially participated AND qualified as a Real Estate Professional. But it goes beyond a title, and even a license.

Qualifications:

You qualified as a real estate professional for the year if you met both of the following requirements.

Material Participation:

More than half of the personal services you performed in all trades or businesses during the tax year were performed in real property trades or businesses in which you materially participated.

The main thing to take away here is MORE THAN HALF. If you have a full time job apart from Real Estate Activities, then your Real Estate Activities have to be twice as much.

For instance, if you have a W-2 job of 40 hours per week, then your Real Estate Activities should total to MORE than 80 hours per week (40 x 2 = 80).

Not to say that it can’t be done (since they go by the annual total), but it is highly unlikely in that instance that you would be considered a real estate professional.

Same rule applies if you have another job that is not a W-2 job. For instance, if you have a job as a Computer Consultant for which you receive 1099 MISC forms, and you work 20 hours per week, you must work more than 40 hours per week as a Real Estate Professional.

More than 750 hours requirement:

You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated. See the list below for possible rental activities. You may have additional activities. If you are not sure, just ask us!

What is a Considered a Valid Activity?

A valid rental activity includes, but is not limited to, any of the following:

• Calling Prospective Renters
• Credit Report
• Researching Repair Options
• Internet Research for Property Value
• Writing Checks, Deposits, Bank Transactions
• Reviewing Statements and Transactional Documents
• Trips to Inspect the Property
• Showing the Property to Prospective Tenants
• Discussing Report Activity with Property Management Companies
• Meeting with Building Inspectors
• Reviewing Fixtures and Appliances
• Walk-Throughs and Final Inspections
• Eviction Proceedings
• Consulting an Attorney for Property Related Issues
• Meetings Relating to Property

Grouping Your Activities:

Caution: You have a choice- either consider EACH property a separate rental activity, or GROUP them all into ONE activity- but follow the instructions!

Generally, each interest you have in a rental real estate activity is a separate activity, unless you choose to treat all interests in rental real estate activities as one activity.

See the Instructions for Schedule E (Form 1040), Supplemental Income and Loss, for information about making this choice.

You can treat one or more trade or business activities, or rental activities, as a single activity if those activities form an appropriate economic unit for measuring gain or loss under the passive activity rules.

Grouping is important for a number of reasons. If you group two activities into one larger activity, you need only show material participation in the activity as a whole. But if the two activities are separate, you must show material participation in each one.

On the other hand, if you group two activities into one larger activity and you dispose of one of the two, then you have disposed of only part of your entire interest in the activity.

But if the two activities are separate and you get rid of one of them, then you have gotten rid of your ENTIRE interest in that activity.

Grouping can also be important in determining whether you meet the 10% ownership requirement for actively participating in a rental real estate activity.

If you clicked on this article, chances are you were denied your Schedule E Rental Real Estate Activity Loss because you did not meet the requirements as stated above. Don’t worry! One of our professionals can advise you about the next steps and also help you with your Rental Activity Log.

This is a complex and common area for Audits, so call us TODAY!

We are not a law firm. We employ attorneys, enrolled agents, and CPA’s.

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