Real Estate Professional Rules

To qualify as a real estate professional for tax purposes, which can affect the treatment of rental real estate activities under the passive activity loss rules, a taxpayer must meet certain criteria set forth by the Internal Revenue Service (IRS). Here are the main requirements:

1. Material Participation: You must materially participate in real property trade or business activities. Material participation means being involved in the operations of the activity on a regular, continuous, and substantial basis.

2. Time Requirements:

   • More than half of the personal services you perform in all trades or businesses during the tax year must be performed in real property trades or businesses in which you materially participate.
   • You must perform more than 750 hours of services during the tax year in real property trades or businesses in which you materially participate.

3. Real Property Trade or Business: According to the IRS, real property trades or businesses include development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or businesses.

4. Documentation: You must keep records of the time you spend on these activities. This can be in the form of calendars, appointment books, or other documentation that tracks your hours and describes the services performed.

5. Joint Filers: If you file jointly, your spouse's participation in real estate activities can't be combined with yours to meet the above tests. Each spouse must individually satisfy the requirements to qualify as a real estate professional.  

6. Grouping Activities: You may group multiple real estate activities into one activity to help you meet the material participation tests, but once you've grouped activities, you must continue to use that grouping in later tax years unless a material change in facts and circumstances occurs.

Qualifying as a real estate professional is significant because it allows you to categorize losses from rental real estate activities as non-passive, which means they can be used to offset other forms of income without the passive loss limitations. This is especially beneficial if you have losses from rental properties and would like to deduct them against your non-rental income.

The IRS scrutinizes real estate professional status closely, so it's crucial to meet the criteria and maintain accurate and detailed records. It's often recommended to consult with a tax advisor or professional to ensure that you are in compliance with the rules and to help you with the grouping election and other strategic decisions.