How to Qualify as a Real Estate Professional?

How to Qualify as a Real Estate Professional?

The IRS Publication 925 establishes the criteria necessary to qualify as a real estate professional for tax purposes. There are a few different ways to look at these rules, but generally speaking investors are required to spend a certain amount of time per year working in real estate. The real estate professional rules are as follows:

More Than 50% Rule-

This rule, called the "more than 50 rule," means that more than half of your working hours in a year must be spent on real estate activities in order to be classified as a real estate professional for tax purposes. If you work a full-time job outside of real estate and only spend a few hours per week managing a rental property, you will not qualify as a real estate professional. This rule is designed to ensure that real estate professionals spend a significant amount of time on real estate activities.

750 Hour Requirement-

To be considered a real estate professional, you must spend more than 750 hours in a year working on things related to real estate.
This includes managing rental units, constructing new buildings, operating properties and businesses, working as a real estate agent or broker, developing or redeveloping properties, and acquiring properties.

This 750 hour requirement is calculated annually from January to December, and you can work these hours whenever you want, as long as they fall within the tax year. It is also important to remember that you must document and prove these hours to the IRS.
Real estate professionals are advised to consider their property interests as one business activity instead of separate businesses, so that the time spent managing and operating each property counts towards the 750-hour requirement, instead of each property having its own 750-hour requirement.

Material Participation-

The IRS uses a test called the "material participation test" to decide if you work enough hours to be considered a real estate professional. This test helps the IRS know if you are really involved in the real estate business, or if you are just an owner who doesn't do much. There are seven ways to show that you "materially participate" in the business, but one of the most common ways is to work at least 500 hours per year. This is often used along with the requirement of working 750 hours in real estate to qualify as a real estate professional. Make sure to show how much you work and participate in the real estate business so you can qualify.
Please feel free to contact us if you are unsure whether this should be included in your tax plan for this year or in the future.

    • Related Articles

    • Real Estate Income Tax Planning

      Understanding Real Estate Investor Classifications- Real estate investing can be a good strategy for building wealth and reducing your taxes. There are three categories the IRS uses to classify real estate investors: Passive Investor Passive ...

    • Health Saving Account

      The Magic Of HSA The Health Savings Account or HSA is one of the most powerful pieces of a well-designed health care strategy. The HSA puts you in control of your own healthcare strategy. It is helping you to save on taxes, cut costs, and build ...

    • Roth IRA

      What is a Roth IRA? A Roth IRA is an individual retirement account (IRA) in which money grows tax-free and come out tax free. What are the Roth IRA income limits for 2022? Roth IRA income limits for the 2022 tax year are $144,000 ($153,000 in 2023) ...