Owning rental real estate does not automatically give you the status of a real estate professional. Qualifying as a real estate professional allows a taxpayer to offset non-passive income which ultimately decreases their tax liability. In order to be considered a real estate professional for purposes of the passive law rules, the IRS has laid out the following requirements that the taxpayer must meet:
- More than 50% of the personal services in the tax year is in real property trade or business.
- More than 750 hours of services during the tax year in real property trades or business
It is important to keep track of the requirements and determine which year the taxpayer will qualify so that expenses can be deducted accordingly. For example, if rental real estate activity does not satisfy the real estate professional requirements in Year 1 but anticipates to qualify in Year 2, the taxpayer should delay any discretionary expenses until Year 2. If the taxpayer accrues these expenses in the year that they do not meet the requirements, then they will not be deductible.
The IRS has clarified that real estate professionals cannot group rental real estate activities with other activities for passive activity rules. So, it is imperative that the taxpayer meet the requirements to qualify as a real estate professional, and that they do not rely on other passive activities in order to meet the requirements.
Written by Madison Massie J.D
