Qualifying as real estate professional (meeting IRS definition)

4 Replies

I presently invest in multi family properties in PA. I look for properties, buy and hand over to a property manager for day to day management. I spend considerable amount of time setting rents for new leases, renewals, reviewing and approving maintenance requests, paying monthly and annual bills for each one of those properties. I spend substantial amount of time looking for and identifying properties to buy. I don't have a full time job. Under these circumstances do I do enough to qualify as real estate professional? I am reading that "looking for properties to buy" is not essentially a qualifying task. If I exclude that activity, I don't do enough to meet the 750 hours per year threshold. Please opine.

@Sudhir N. Ive heard too that looking for properties doesn’t count towards the 750 hours requirement.

It’s fairly difficult to actually spend 14 hrs/week (750 hours a year) on a few properties. I’d suggest start logging your time in a spreadsheet or an app and see how much it is over a month.

Ive been logging my hours and even given the ling hours I spend writing my lease documents and cleaning the properties, generating monthly payment invoices, paying vendors and utilities, I just hover around the 800 number.

Originally posted by @Sudhir N. :

I presently invest in multi family properties in PA. I look for properties, buy and hand over to a property manager for day to day management. I spend considerable amount of time setting rents for new leases, renewals, reviewing and approving maintenance requests, paying monthly and annual bills for each one of those properties. I spend substantial amount of time looking for and identifying properties to buy. I don't have a full time job. Under these circumstances do I do enough to qualify as real estate professional? I am reading that "looking for properties to buy" is not essentially a qualifying task. If I exclude that activity, I don't do enough to meet the 750 hours per year threshold. Please opine.

 Research time and looking for new properties aren't qualifying hours. 

Also the only test isn't just meeting 750 hours- you also have to spend more time on real estate than any other combined activities. 

So if you work a full time job you'd need more qualifying hours spent on your rentals- than you worked in a year at your job.

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Originally posted by @Sudhir N. :

I presently invest in multi family properties in PA. I look for properties, buy and hand over to a property manager for day to day management. I spend considerable amount of time setting rents for new leases, renewals, reviewing and approving maintenance requests, paying monthly and annual bills for each one of those properties. I spend substantial amount of time looking for and identifying properties to buy. I don't have a full time job. Under these circumstances do I do enough to qualify as real estate professional? I am reading that "looking for properties to buy" is not essentially a qualifying task. If I exclude that activity, I don't do enough to meet the 750 hours per year threshold. Please opine.

If you don’t have W-2 jobs, you can qualify if you can put in hours. You also have to very diligent and creative on recording. Make sure to take notes how to document your hours and types of activities.

In the case Birdsong, doctor's wife demonstrated that she actively and extensively managed their rental properties and was therefore a “real estate professional”.

“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.

An individual's work as an investor for the individual's own use isn't participation unless the individual is directly involved in day-to-day management or operations.

Work done as an investor includes (1) studying and reviewing financial statements or reports on operations of the activity, (2) preparing or compiling summaries or analyses of the activity's finances or operations for the individual's own use, and (3) monitoring the finances or operations of the activity [Temp. Reg 1.469-5T(f)(2)(ii)]. Time spent performing this work does count if the individual is directly involved in the management of the activity.

Note: Participation by Shareholder's Spouse- When applying the material participation rules, participation by a shareholder's spouse is considered participation by the shareholder, regardless of whether the spouse has an ownership interest.

@Jai Reddy , @Natalie Kolodij , @Ashish Acharya - My sincere thanks to all of you for giving your opinions. I now understand what constitutes as qualifying tasks. It is clear I am nowhere near meeting the requirements, though real estate investing (but not actively managing) is my full time job. I spend no more than 5-6 hrs. / week on property related tasks with the rest handled by the property management company.