Are You A Real Estate Professional?

Like most questions, the answer is that it depends. Real estate investors should pay close attention to whether they are materially involved in the property or act only as a passive investor. While there are benefits to being a RE professional, many of the same benefits derive from business ownership.

Key take-aways:

• Always check with your tax professional (CPA, tax attorney, et. al)
• Owning a property does not necessarily mean materially involved (see detailed requirements below)
• The IRS code changes every year (check it for updates to these regulations)

No, having a real estate license does not automatically qualify one as a real estate professional under the IRS rules. To qualify as a real estate professional, a taxpayer must meet the following requirements:

• Materially participate in each real property trade or business in which the taxpayer has rental activity.
• Perform more than 50% of their personal services in real property trades or businesses.
• Perform more than 750 hours of personal services in real property trades or businesses.

A real estate license is not required to meet any of these requirements. However, it can be helpful in demonstrating that a taxpayer is materially participating in a real property trade or business.

For example, if a taxpayer owns and manages several rental properties, they may be able to demonstrate material participation by showing that they spend a significant amount of time on activities related to those properties, such as:

• Showing properties to potential tenants
• Screening tenants
• Negotiating leases
• Maintaining and repairing properties
• Managing tenant issues

Even if a taxpayer has a real estate license, they may not qualify as a real estate professional if they do not meet the other requirements. For example, if a taxpayer only spends a few hours per week managing their rental properties, they may not be considered to be materially participating in those activities.

Taxpayers who are unsure whether or not they qualify as real estate professionals should consult with a tax advisor.

Here are some additional things to keep in mind:

• The IRS has a number of resources available to help taxpayers understand the real estate professional rules, including Publication 925 and Revenue Procedure 2002-22.
• Taxpayers can also contact the IRS directly for assistance with questions about the real estate professional rules.
• Taxpayers who claim real estate professional status on their tax return should be prepared to document their activities to support their claim.