Can I qualify as real estate professional?

Question

Hi BP folks,

I ran a real estate software company last year and probably spent more than 750 hours on building the software. The software allows real estate investors analyze rentals and flips etc, can I qualify as a real estate professional?

Eamonn McElroy · Answer

@Johnny Situ

If you have a full-time, non-equity W-2 job, you'd have to work over 4,000 hours a year to even start considering RE pro status.

While not impossible, it is highly improbable, as it translates to an average of 77 hours a week, every week of the year (Thanksgiving week, Christmas week, Forth of July week, you name it).

Eamonn McElroy · Answer

A real estate software company is not a real property trade or business.

Natalie Kolodij · Answer

Still not very likely.

There is a 2 part rule- 750 hours and also more time on your RE activity than ANY other combined activities.

Natalie Kolodij · Answer

Nope.

Jonathan R McLaughlin · Answer

@Andrew S. Is exactly right. The big test is the 500 hours actually managing rental property, not research for acquisitions etc. 750 hours on real estate may get uou REP status but it does NOT turn your losses active by itself

Johnny Situ · Answer

@Patrick M Nichols @Andrew S. Thank you guys for the suggestions, the odds are definitely not in my favor.

Andrew S. · Answer

You may be able to pull it off, but because it is such a stretch for most people, it represents a large red flag to the IRS.  Therefore an audit is likely and you should be prepared to supply documentation (a very detailed daily log of all of your RE activities appears to be essential).  If you have credible documentation, go ahead and claim it.  Be aware that even if all your tasks add up to the right number of hours, the IRS will judge every individual task and decide whether it is “allowed” or not, so if they disallow some, then you may still fall short.  For example, spending 2 hours fixing the toilet in one of your self-managed rentals almost certainly qualifies.  Running internet searches for new RE deals or pulling crime statistics for a place at the other end of the country where you “might” want to invest in the future, may well NOT hold water in the eyes of the IRS

Patrick M Nichols · Answer

I think the issue is that the IRS (or your accountant) is unlikely to believe you that you are really working 1400 additional hours in real estate activities simply based on your own say-so. I think there have been closer cases that came before the Tax Court that have lost, but you're free to find an accountant that might accept this position. It'll be an audit red flag.

Johnny Situ · Answer

@Natalie Kolodij thank you, yea I guess I am not gonna risk that this year.

Johnny Situ · Answer

@Eamonn McElroy Thanks, my situation is a bit different, I work remotely so I can manage my time a bit differently. Say I work 235 days (after holidays and PTO) a year and 6 hours a day, that's roughly 1400 hours a year, that makes working more than 1400 hours a year on real estate activities possible. Thoughts?

Can I qualify as real estate professional?

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