Disability and Real Estate Professional Tax Filing- red flag?

Question

We acquired two vacation rental this year and hired a property manager.

My husband is on long term disability, but he has done substantial work to acquire and set up the rentals. The work is all behind the phone and internet. Nothing physical. He easily meets the qualifications for “Real Estate Professional”.

We have rental expenses well over 25K and my w2 income is over the threshold.

Can we file this status if he meets the requirements, yet collects disability?

Before he became disabled, he did not work in real estate industry and does not have any credentials in this field either.

We are located in the SF Bay Area and looking for a real estate CPA and/or welcome any advice that can help us!

Basit Siddiqi · Answer

Account Closed"vacation rental" is this a property that you live in for part of the year. or is this a property that you use for short-term rentals?Are these two properties the only 2 properties that you own?You are required to spend 750 hours doing activities that are real estate related.While it is possible, it is hard to imagine that there was 375 hours spent on 1 property in 1 year. Especially if there is a property manager in place.Real estate professional status is also not something that you decide to claim at the end of the year. It is something that you should track the details/progress throughout the year.The IRS may require a log of the hours spent in the case of an audit.

Eamonn McElroy · Answer

Account Closed

Merry Christmas and Happy New Year.

Eamonn McElroy · Answer

Account Closed have already given you a great run-down.

While your husband's physical disability won't have any weight on whether or not he qualifies as a 'real estate professional', you guys taking the position that he is a real estate professional while only having two investment properties that are being managed by a third-party property manager may raise a few eyebrows at the IRS.

Not impossible, however it is improbable.  Like Basit already said.

Do you have the documentation to support this position?  750 hours a year comes out to approximately 14.5 hours a week, every week of the year.

It may be advisable to have your husband begin logging his real estate activity in a spreadsheet every week if you believe he is close to the 750.

Ashish Acharya · Answer

Account Closed.

As he mentioned, vacation rentals have limits on expenses to the extent of the income anyway.

Maybe your use of  word “vacation rental” was not intended. That needs to be clarified first.

Did you personally used the property more than greater of 10% of rental days or 14 days ? If not, the activity is not subject to vacation home limitations.

Also, Unless he does day to day management of the property( which he does not as your have PM), the hour he spent in a capacity of investors does not count. For eg. He can’t count hours he spent on analyzing the financial.

Account Closed · Answer

@Eamonn McElroy thanks. No we don't have a log but definitely will start one. I have receipts indicating furniture purchases and vehicle fuel purchases  in the area, but didn't log our time. Thanks for your response- it's helpful

Account Closed · Answer

thanks @Basit Siddiqi and @Ashish Acharya

I purchased this property for short term rentals. I also have a primary residence.

Thanks for the advice, I can see more clearly now that it may appear unreasonable to claim the real estate professional status with only 2 investment properties.

Disability and Real Estate Professional Tax Filing- red flag?

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