Do I Qualify as a Real-estate Professional?

Question

I'm investigating if I qualify as a RE Professional for the IRS.  I'm retired with no W2 income.  Primary income is from real estate, investments, pensions and IRA.  We currently own 38 units held in LLCs and privately.  We just turned over the day-to-day management to PM.  We turned one the management to allow more time to acquisitions and renovations.   Even so I'm involves with setting rents and approving repairs.  My wife and I do our own renovation work and make readies.  We do our own repairs except were we need licensed trades ie Plumber or Electrical.  I'm currently working on a duplex renovation.  We took the kitchen and bath down to bare studs and are rebuilding.  We easily meet the 750 hr requirement.  I have a meeting set up with a CPA, what other things are they going to be looking for?

Basit Siddiqi · Answer

The most important aspect of it is creating the log documenting the hours.

If you are under an audit, that is the first thing that they will ask for.

I have created a nice efficient log for clients where there are a lot of drop down functions instead of typing in words to save time.

Simon Misiewicz · Answer

1. Material Participation: To qualify as a real estate professional, you must meet the IRS's material participation requirements. This means you must be involved in the day-to-day management and operations of your rental properties. The CPA will likely inquire about your involvement in setting rents, approving repairs, and overseeing renovations.

2. Hourly Requirement: You mentioned that you easily meet the 750-hour requirement, which is essential for qualifying as a real estate professional. The CPA may ask for documentation to support the number of hours you spent on real estate activities, such as logs, calendars, or other records.

3. Recordkeeping: Having accurate and organized records is crucial when claiming real estate professional status. The CPA will review your records to ensure they are detailed and well-maintained.

4. Documentation of Services: The CPA may ask for evidence of the services you provided related to the properties. This could include emails, contracts, invoices, or any other documentation that shows your involvement in property management, renovations, repairs, and other related activities.

5. Comparing Hours to Other Activities: The CPA may inquire about your other sources of income, such as investments, pensions, and IRA withdrawals, to determine if real estate activities are your primary source of income.

6. Active Participation in Management: The CPA will want to ensure that you were actively involved in the management of the properties and not just a passive investor.

7. Planning for Deductions: If you qualify as a real estate professional, it could have significant tax implications. The CPA will likely discuss how this designation impacts your tax deductions and overall tax strategy.

8. Other Considerations: The CPA may explore any other relevant factors that contribute to your qualification as a real estate professional, such as the nature of your involvement in the properties and your intentions to continue this level of activity.

Be prepared to provide detailed information about your real estate activities, hours spent, and any other relevant documentation to support your qualification. The CPA's analysis will help determine if you meet the IRS requirements, and they can provide guidance on how to maximize tax benefits based on your real estate professional status.

Chris Picciurro · Answer

Here is a visual resource for you. Have a great day!

Natalie Kolodij · Answer

Hey there- this appears to be an AI generated response which we're trying to discourage on the forums - Please try to refrain from utilizing them.

Eric Williams · Answer

This dude nailed it.

And if you want to be even more precise, here is the standard.As we have observed in countless opinions, deductions are a matter of legislative grace, and the taxpayer bears the burden of proving entitlement to any claimed deduction. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). A taxpayer claiming a deduction on a federal income tax return must demonstrate that the deduction is allowable pursuant to a statutory provision and must further substantiate that the expense to which the deduction relates has been paid or incurred. § 6001; Hradesky v. Commissioner, 65 T.C. 87, 89–90 (1975), aff’d per curiam, 540 F.2d 821 (5th Cir. 1976). A taxpayer must substantiate deductions claimed by keeping and producing adequate records that enable the Commissioner to determine the taxpayer’s correct tax liability. § 6001; Hradesky, 65 T.C. at 89–90.afdbf16d-174e-41c7-91b0-b70f431e6b3d (ustaxcourt.gov)

Bette Hochberger · Answer

Seems like a yes!

Michael Smythe · Answer

Yep, but speak with a tax professional.

John Malone · Answer

@Pete Harper seems liks it but they should be able to confirm for you!

Chris Picciurro · Answer

It sounds like a yes.

Denver McClure · Answer

It appears that you meet the requirement. I'd suggest chatting with @Jeff Nash when you get the chance. He's very familiar with RE professionals and tax benefits.

Do I Qualify as a Real-estate Professional?

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