Real Estate Professional Status

One tax benefit that is available to people who own real estate, especially those who are fortunate enough to own multiple properties, is the "Real Estate Professional" status.  It's a status that can unlock significant tax benefits, but it's not without its rules and challenges.  Not everyone will qualify to be designated as a Real Estate Professional (despite what your friends and neighbors might tell you), so it is important to know what requirements there are to qualify for this status.  Here are a few things to know and keep in mind:

1: Time is of the Essence

One of the primary criteria for being classified as a real estate professional is the time you spend on real estate activities. To qualify, you must spend more than 50% of your working time (over 750 hours per year) on real estate-related tasks. Some people think that they can have a full-time job (non-real estate related) and still get the real estate professional status by achieving the 750 hours requirement. This would fail the 50% requirement in an IRS audit.  However, if you have a non-working spouse (and file a married filing joint return) then it might be worth having the non-working spouse be in charge of your real estate activities while you focus on your full time job.  If your spouse can hit the 750 hours requirement then you both will benefit on your married filing joint return.

2: Material Participation Matters

Not only do you need to invest your time, but your involvement in real estate activities must be "material." The IRS provides a guideline to determine material participation, which includes activities like management, construction, or development of real estate. 

3: Maintain Good Records

The IRS loves documentation. If you're aiming to be classified as a real estate professional, you'll need to keep a good record of your activities. Document your hours, tasks, and responsibilities related to real estate. This documentation will be your secret weapon when defending your professional status in an IRS audit.

4: No Mixing Business and Pleasure

Being a real estate professional means you can deduct real estate losses against your other income, which is the main reason why people want the real estate professional designation. However, you can't mix your personal and professional life. Maintain a clear separation between your real estate activities and any other business (or personal activity) you may be involved in.  Keep a separate bank account for your real estate activities to help distinguish your real estate items from your other items. 

5: Passive or Active, Not Both

In the world of real estate, there's a distinction between passive activities and active participation. You want to be on the active side. Passive activities don't count towards your real estate professional status. So, choose your real estate ventures wisely, and make sure you fall into the active category for each property (or each group of properties).

Being classified as a real estate professional can be a game-changer for your tax situation (especially when you couple it with things like cost segregation studies). It's a complex tax strategy, but with the right approach, it can provide significant benefits.  Please reach out to me if you think you may qualify for the real estate professional status or if you would like to put yourself in a position to qualify for that status in the future.

Disclaimer: This blog post was created with the assistance of AI tools.  Bruner CPA Services would love to have more hours in the day to fully understand the intricacies of SEO and how best to create meaningful content that helps their website remain relevant.  But alas, the robots can do it better.  As such, AI tools were used to help create this blog post with review, edits, and additions made by Bruner CPA Services.