A taxpayer qualifies as a real estate professional if (1) more than one-half of the personal services the taxpayer performs in trades or businesses during the tax year are in real property trades or businesses in which the taxpayer materially participates, and (2) hours spent providing personal services in real property trades or businesses in which the taxpayer materially participates total more than 750 during the tax year.
You have to meet both tests not just satisfy the 750 hours. If more than half your hours during the year between work and the rentals, aren't dealing with the rentals then you won't pass the first test.
Originally posted by @Alexander Spira :
I want to make sure I rack up 750 hours doing real estate this year to get my losses counted against my W2 earnings. I have 6 units and it is taking up lots of my time. The question is what counts ? For example to see my properties I travel around 4 plus hours. Many times I break up the trip and sleep overnight by a friend, technically I'm in route so is the nights sleep considered time in real estate.
Another example writting this post or going to the bank to deposit cash.
What counts towards those 750 hours?
The bigger pockets community is a major inspiration.
Thank you very much for taking the time to read my question.
What can I count towards those 750 hours that would allow me to claim real estate as part of my
If you keep track of time, most of the time is included.
Hours pertaining as investor the hours related to investment activities should not count towards the 750-hour requirement. If a taxpayer's capacity in a given activity is more akin to that of an investor, then the activity cannot be treated as participation for purposes of deducting passive losses unless the taxpayer is involved in day-to-day management. Temporary Income Tax Regs defines investor activities as follows:
(1) Studying and reviewing financial statements or reports on operations of the activity;
(2) Preparing or compiling summaries or analyses of the finances or operations of the activity for the individual's own use; and
(3) Monitoring the finances or operations of the activity in a non-managerial capacity.
Recently, in the court case, Birdsong, doctor's wife demonstrated that she actively and extensively managed their rental properties and was therefore a “real estate professional”.
RE professional is not limited by passive loss limitation on the house they materially participate.
It shows that with property and diligent planning, you can use the rental loss. We know most of investor in the same situation as described below. Make sure to take notes how to document your hours and types of activities.
“The husband worked full-time as an emergency physician, while his wife divides her time between caring for their children and managing their rental properties. In 2014, wife was the sole party actively involved in the day-to-day management of their rental properties. The activities of wife with respect to the rental properties included, among other things, cleaning common areas, collecting coins from washing machines, performing repairs at the properties, communicating with tenants, collecting and depositing rent, maintaining insurance policies, purchasing materials for the properties, as needed, paying bills and keeping books and records for tax accounting purposes. Occasionally, wife hired a contractor to perform tasks she could not complete herself. When wife hired a contractor, she spent considerable time researching and contacting contractors, obtaining price quotes and supervising repairs. Wife's property management duties also included inspecting units, preparing units for rental, advertising vacant units, screening potential tenants, showing the units and processing rental applications.
Wife produced two spreadsheets detailing her rental management activities. The first spreadsheet reflected that wife logged 844.75 hours managing the rental properties in 2014, and the second spreadsheet showed a total of 1,136.25 hours. The second spreadsheet included previously omitted tasks such as investor hours and driving time between the rental properties and the hardware store and other locations pertinent to the management of the units. The case specifically stated that the taxpayers used wife's calendar and receipts to reconstruct the time and entries on both spreadsheets for the first half of 2014, and that for the second half of 2014, the time entries came from a contemporaneous log wife maintained on her phone on which she entered the date, location, time and description of each task she performed. Wife also supplied receipts and invoices substantiating the hours she logged” - Source Checkpoint.
The court first noted that a taxpayer may establish hours of participation in a real property trade or business by any reasonable means. The court further stated that this does not require contemporaneous daily reports and that reasonable means includes “appointment books, calendars, or narrative summaries” that identify the services performed and “the approximate number of hours spent performing such services.”Nevertheless, the court also stated that it was not required to accept a postevent ballpark guestimate or the unverified, undocumented testimony of taxpayers.
Note: The court also did not count any hours for seminars because it found the taxpayers did not present evidence to show how the seminars related to the residential rental activities.
Hope that helps.
"technically I'm in route so is the nights sleep considered time in real estate."
Nope. Sleeping does not count toward your real estate professional hours. : )
Doesn't matter if you're traveling for business.
As @Zachary Bohn noted, 750 hours in real property trades or businesses is only half of the two prong test.
You noted that you're a W-2 employee. If you're full time, the second prong would generally require you to spend more than 2,000 hours a year in real property trades or businesses. Added together with your W-2 job, this would mean you're working approximately 77 hours a week, every week of the year (e.g. Thanksgiving week, Christmas week, etc).
This is why it's not impossible, but highly improbable that a full time W-2 employee would qualify as a real estate professional, except in very limited situations (e.g. 5% or more owner-employee of a real property trade or business).
Excellent explanation by @Ashish Acharya of the hours that count
Excellent explanation by @Eamonn McElroy of why it probably does not work for you anyway
To your specific sample questions:
- sleeping - haha, nice try, but 100% no. May I steal your suggestion for my presentations, please? It's very funny.
- writing this post - 50/50 chance, meaning include it but do not count on it
- cash deposit to the bank - yes, if the cash is a rent payment you collected. No if the cash was found in your couch crevices.
Thank you all @Zachary Bohn @Ashish Acharya @Eamonn McElroy @Michael Plaks
The answer's are not what I wanted to hear as basically the write offs will not count against my W2 income. The answers are correct and most importantly will keep me far away from tax evasion and the slammer. This is probably one of the most educational responses I've gotten. I will be rereading all your posts.
Feel free to use my attempt of sleeping counting as work for others.
Good luck to all.
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