Managing parents' property, enough to qualify as a REP?

Question

My parents' have a commercial property. For various reasons, I don't love the current property and want to 1031 exchange it for them.

If I manage the whole process, can I qualify as a REP?
-manage the selling of current property
-"manage" the 1031 exchange (I use the word "manage" loosely here since it would involve an org to help with this)
-manage the purchase of the new property
-manage insurance, invoices, the loan, distributions, etc on an ongoing basis

Are there any liability or qualifications I need to be aware of as well? Do they need to "pay" me say $200 a month or something to help me further qualify?

The new property would likely not be local. It would likely be NNN and out of state. So involvement may be somewhat limited.

Ashish Acharya · Answer

@Bob Dole,

Totally understand where you’re coming from. A lot of people hope that “working professionally” on someone else’s property will get them close to REP, but the rules are much tighter than they seem.

You can absolutely help your parents with the 1031 exchange, but that alone will not qualify you as a Real Estate Professional. REP status is based on two tests. You must spend more than 750 hours a year in real estate and it must be more than half of all the work you do. Managing one NNN property, especially out of state, usually will not generate enough hours to qualify.

Also, hours worked on someone else’s property only count if you materially participate and have a real ownership stake. Helping family members without being an owner does not qualify for REP hours. Getting paid a small amount does not fix this, although doing the work under a real property management business can sometimes help.

So the 1031 part is fine, but it will not help you get REP unless you are also an owner and actively managing multiple properties at a much higher hour level.

Jason Malabute · Answer

To qualify as a Real Estate Professional under the IRS rules, you must log at least 750 hours each year doing real, measurable work in your rental business. Based on what you shared, it doesn’t seem likely that you’d reach that threshold. There are other requirements too, but the 750 hours is usually the hardest one to meet for you in your situation

Dave Foster · Answer

@Bob Dole, It's not uncommon for a child or employee, friend or advisor "manage" a 1031 exchange for one of our clients. But the problem is that dreaded $750 hours! Your involvement with the 1031 is not going to be a great amount. Unless you become heavily involved in the marketing of the old property. And the location/underwriting, and purchasing of the new property.

Rohullah Sharifi · Answer

Yes, you may qualify only if the property is yours or you are listed on the title. Otherwise, your role would be considered that of a property manager receiving a fee, which does not meet the qualification requirements.

Additionally, who is reporting the rental activity in the tax return, you or your parents?

Michael Plaks · Answer

@Bob Dole

The annual minimum for REPS is 750 hours of actual hands-on work. I doubt that there's a potential for 750 hours in what you described.

Not to mention other conditions, but I think 750 hrs is your biggest hurdle.

Bob Dole · Answer

Argh, the dreaded 750 hour requirement. I thought that was just for your own stuff. But if my parents were to pay me say $200 a month to manage it, I would still need 750 hours?

Yeah I don't think there's 750 hours of work there. Maybe a couple of hundred hours during the buying/selling/1031'ing of things. But once that's done it should be relatively straightforward.

Oh well. Back to the drawing board!

Managing parents' property, enough to qualify as a REP?

7 Replies