Real Estate Professional Status and SE tax

[Brady Ascheman]

Hi everyone, when meeting with my CPA recently I was instructed by here that if you obtain "Real Estate Professional Status" as per the IRS rules then your rental income become "active" instead of "passive" income in the eyes of the IRS. She then stated that when it becomes active income it is subject to the 15.3% self-employment tax. I wanted to get some insight from others on if this is true since I can't find a good answer on the IRS website, and if it is true why does anyone want to gain real estate professional status?

[Stephen Nelson]

Quote from @Brady Ascheman:

Hi everyone, when meeting with my CPA recently I was instructed by here that if you obtain "Real Estate Professional Status" as per the IRS rules then your rental income become "active" instead of "passive" income in the eyes of the IRS. She then stated that when it becomes active income it is subject to the 15.3% self-employment tax. I wanted to get some insight from others on if this is true since I can't find a good answer on the IRS website, and if it is true why does anyone want to gain real estate professional status?

Just to clarify something subtle, being a real estate professional doesn't make your rental properties nonpassive. Being a real estate professional just means your rental properties are not automatically passive. This is an important distinction.

Example: You're a self-employed realtor and work full-time. You are a real estate professional because you meet the requirements of Section 469(c)(7). You go out and buy an apartment house and then hire a property manager so you don't have to personally spend time on the property. In this case, your rental property is passive because you lack material participation in the rental activity.