Real Estate Professional Tax Status

The real estate professional tax status is a designation under U.S. tax law that allows qualifying individuals to treat rental real estate activities as non-passive for tax purposes. This status can provide significant tax benefits, such as the ability to fully deduct rental losses against other sources of income, which is generally restricted for non-real estate professionals.

1. Material Participation
   You must materially participate in your real estate activities. This typically means you are actively involved in the day-to-day management or operations of your properties (e.g., finding tenants, collecting rent, arranging repairs).
   • IRS defines material participation through seven tests, one of which must be met. For example, you must participate in the activity for more than 500 hours in a year.
2. Real Property Trade or Business
   • More than 50% of your total personal services for the year must be in real property trades or businesses in which you materially participate.
   • You must spend at least 750 hours per year in real property trades or businesses where you materially participate.

The IRS considers several activities as qualifying real property trades or businesses, including:

• Real estate development or redevelopment
• Real estate construction or reconstruction
• Real estate acquisition or conversion
• Real estate management or leasing
• Real estate brokerage

To prove your status, you should maintain detailed records, including:

• Time logs showing hours spent on real estate activities.
• Descriptions of tasks performed (e.g., property management, tenant interactions, marketing).
• Supporting documents like contracts, emails, and invoices.

1. Deduction of Rental Losses
   • Without this status: Passive activity loss (PAL) rules limit rental losses to $25,000 (and phase out completely for taxpayers with adjusted gross income over $150,000).
   • With this status: Rental losses can offset non-passive income, such as wages, interest, or dividends.
2. Offset of Other Income
   • By qualifying as a real estate professional, rental activities are considered part of your active income stream, allowing you to offset other sources of income with real estate losses

• Spousal Participation: Hours worked by your spouse cannot count toward your 750-hour requirement, but they can be combined for the material participation test.
• Aggregation Election: You may choose to group all your rental activities as one for purposes of meeting the material participation requirement, but this election must be made with a tax filing

Real estate professional status often draws IRS attention because of its substantial tax benefits. To avoid issues:

• Ensure your record-keeping is meticulous.
• Be prepared to demonstrate that your time and activities meet the requirements.

Please contact our office if you’re unsure about your status or want to optimize your tax situation. Consulting a tax professional with expertise in real estate is strongly advised.