Real Estate Professional status is a unique designation under U.S. tax law that can have significant benefits for individuals involved in real estate activities. Here’s a breakdown of what this status means, how to qualify, and why it matters for your tax situation.
What is Real Estate Professional Status?
Real estate professional is a tax status that allows certain taxpayers to have all rental activities treated as non-passive.
Qualifying for Real Estate Professional Status
To qualify for this status, you must meet two primary criteria:
- More than 50% of your working hours must be in real estate activities:
- You must spend more than half of your personal service time in real property trades or businesses. This includes activities such as property development, construction, acquisition, conversion, rental operations, management, leasing, and brokering.
- You must work at least 750 hours a year in real estate activities:
- The IRS requires that you spend at least 750 hours annually in real property businesses where you materially participate. This is an all-or-nothing test—if you fail to meet this threshold, you cannot claim the status.
Both of these requirements mean that documentation is key! You must maintain detailed logs of how and when your hours were spent to justify claiming this status.
Material Participation
Each activity must independently meet at least one of the following material participation tests to be included under the Real Estate Professional Status:
- You participated in the activity for more than 500 hours.
- Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who didn’t own any interest in the activity.
- You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who didn’t own any interest in the activity) for the year.
- The activity is a significant participation activity, and you participated in all significant participation activities for more than 500 hours. A significant participation activity is any trade or business activity in which you participated for more than 100 hours during the year and in which you didn’t materially participate under any of the material participation tests, other than this test. See Significant Participation Passive Activities under Recharacterization of Passive Income, later.
- You materially participated in the activity (other than by meeting this fifth test) for any 5 (whether or not consecutive) of the 10 immediately preceding tax years.
- The activity is a personal service activity in which you materially participated for any 3 (whether or not consecutive) preceding tax years. An activity is a personal service activity if it involves the performance of personal services in the fields of health (including veterinary services), law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital isn’t a material income-producing factor.
- Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the year.
Tax Implications
If you qualify as a Real Estate Professional, the primary benefit is the ability to deduct unlimited rental losses against non-passive income. For higher income earners, you also get to avoid the additional Net Investment Income Tax.
Get Accurate Advice
Real Estate Professional is an often misunderstood and underutilized tax status for real estate developers, landlords, realtors, and house flippers. There are many factors to consider when determining if an individual qualifies. Taxpayers should seek advice from a knowledgeable tax preparer before claiming this status.
Let’s work together to simplify your tax landscape and help you focus on what you do best – whether it’s growing your business or closing the next big real estate deal. Reach out today, and let’s start a conversation about how we can make your tax situation work best for you and your goals.
