Real Estate Professional

[ETax847]

Does a real estate broker count as a real estate professional for deducting rental income losses?

[Guest Taxed]

Depends. See the requirements. Are they satisfied?

To qualify for this exemption, you (or your spouse) must spend more than half of your total working hours during the year in one or more real property businesses--a minimum of 751 hours is required. In addition, you must “materially participate” in your rental activity. This requires that you work a certain number of hours at your rental activity during the year. For example, you would materially participate if you work at least 500 hours during the year at the activity. You can qualify in other ways as well.

If you own more than one rental property, you are required to materially participate for each rental property you own unless you file an election with the IRS to treat all your properties together as one single activity. This way, you can combine the time you spend working on each rental property to satisfy the material participation test. If you fail to file the election, you’ll have to materially participate for each rental property you own. For most landlords, this is impossible to do, which makes filing an election very important.

[jshtax]

Depends. See the requirements. Are they satisfied?

To qualify for this exemption, you (or your spouse) must spend more than half of your total working hours during the year in one or more real property businesses--a minimum of 751 hours is required. In addition, you must “materially participate” in your rental activity. This requires that you work a certain number of hours at your rental activity during the year. For example, you would materially participate if you work at least 500 hours during the year at the activity. You can qualify in other ways as well.

If you own more than one rental property, you are required to materially participate for each rental property you own unless you file an election with the IRS to treat all your properties together as one single activity. This way, you can combine the time you spend working on each rental property to satisfy the material participation test. If you fail to file the election, you’ll have to materially participate for each rental property you own. For most landlords, this is impossible to do, which makes filing an election very important.

I think there is some 125 hour test somewhere for this but not sure.

[Guest Taxed]

I think there is some 125 hour test somewhere for this but not sure.

I pasted from Taxbooks. Did not see any 125 hour test??

Real Estate Professionals

Rental activities are considered passive activities regardless of

whether material participation rules are met, with the exception

of real estate professionals. Activities of real estate professionals

are not treated as passive activities.

Qualification.

The taxpayer qualifies as a real estate professional

if both the following requirements are met.

1)

More than half the personal services the taxpayer performed

in all trades or businesses during the tax year were performed

in real property trades or businesses in which the taxpayer

materially participated, and

2)

The taxpayer

performed more than 750 hours of services dur-

ing the tax year in real property trades or businesses in which

the taxpayer materially participated.

Personal services performed as an employee do not count unless

the taxpayer was a 5% or greater owner of the employer.

Real property trades or businesses include development, con

-

struction, acquisition, conversion, rental, operation or manage

-

ment, or brokerage of real property.

Election to combine rental activities.

For purposes of qualifying

as a real estate professional, each of the taxpayer’s rental activi

-

ties are treated as separate activities unless the taxpayer elects to

treat all interests in rental real estate as a single activity. Failure

to make the election can trigger passive loss limits for real estate

professionals.

To make the election, the taxpayer must file a statement with the

original income tax return declaring that he or she is a qualified

taxpayer for the taxable year and is making the election to treat all

interest in rental real estate as a single rental real estate activity

pursuant to IRC section 469©(7)(A). The election is binding for

the taxable year it is made and for all future years whether or not

the taxpayer continues to be a qualifying taxpayer. A taxpayer may

revoke the election only in the taxable year in which a material

change in facts and circumstances occurs. [

Reg. §1.469-9(g)(3)]

[Mr. Pencil]

Does a real estate broker count as a real estate professional for deducting rental income losses?

Yes, if the brokerage work meets the criteria for material participation it can count towards RE professional status. But to deduct losses the rental activity must also have material participation, which is usually not the case unless he can group multiple properties as an economic unit. One of the problems is that he can't bump up his hours by doing repairs and maintenance which would normally be done by a contractor or service.

[Jack from Ohio]

Does a real estate broker count as a real estate professional for deducting rental income losses?

Most do NOT meet the requirements for a "Real Estate Professional."

The most often missed requirement is: "The taxpayer performed more than 750 hours of services during the tax year in real property trades or businesses in which the taxpayer materially participated."

[Guest Taxed]

Etax847, after reading the requirements does your client meet the requirements of a Real Estate Professional?

[ETax847]

I came across this (client is a real estate agent that is 1099'd from her employer and owns 2 rental properties) Based on the following, Im led to believe client would qualify

However, if you are in a real estate activity type profession, such as a real estate agent, then you will qualify as long as you own 5% or more of the business that is paying you. Don't let this confuse you if you are a real estate agent. You are most likely paid as an independent contractor. That independent contractor income IS your business.

However, if you are paid as an employee of a real estate agency and do not own a minimum of 5% of the company, then you will not qualify under this provision. First, you will need to understand what real estate activities actually are. A qualified real estate activity is any thing in which you "develop, redevelop, construct, reconstruct, acquire, convert, rent, operate, manage, lease, or sell" real estate.

Remember that the key is that you perform personal services in these activities, but you don't necessarily have to be the one performing the work. You can be supervising, meeting, planning--all of the activities that go into truly running a business.

Read more: http://www.creonline.com/irs-definitions-real-estate-investors-part-1.html#ixzz2oKbYVKzF

[Jack from Ohio]

I came across this (client is a real estate agent that is 1099'd from her employer and owns 2 rental properties) Based on the following, Im led to believe client would qualify

However, if you are in a real estate activity type profession, such as a real estate agent, then you will qualify as long as you own 5% or more of the business that is paying you. Don't let this confuse you if you are a real estate agent. You are most likely paid as an independent contractor. That independent contractor income IS your business.

However, if you are paid as an employee of a real estate agency and do not own a minimum of 5% of the company, then you will not qualify under this provision. First, you will need to understand what real estate activities actually are. A qualified real estate activity is any thing in which you "develop, redevelop, construct, reconstruct, acquire, convert, rent, operate, manage, lease, or sell" real estate.

Remember that the key is that you perform personal services in these activities, but you don't necessarily have to be the one performing the work. You can be supervising, meeting, planning--all of the activities that go into truly running a business.

Read more: http://www.creonline.com/irs-definitions-real-estate-investors-part-1.html#ixzz2oKbYVKzF

She will only qualify if she can document 750 hours for EACH rental (unless she bundled them). I disagree. I do NOT think she qualifies. She would have to spend 14 1/2 hours each week. For 2 rentals, that is not feasible or reasonable.

[MsTabbyKats]

If you own rental properties....you are a landlord. This isn't the same occupation as being a real estate broker.

I forget the hours you need.....but if you are a full time "anything"....it's unlikely you'd have enough time to devote to your occupation as a "landlord real estate professional".

I declined a job once because of this issue. He claimed he was a professional.....I knew he wouldn't qualify. Sure enough....he was audited....and not very happy with the outcome.

[Guest Taxed]

>> I came across this (client is a real estate agent that is 1099'd from her employer and owns 2 rental properties) Based on the following, Im led to believe client would qualify.

I would be very reluctant to give that opinion without knowing exactly how many hours they spent managing the rentals!

If you are wrong the disallowed losses (suspended for future years) could cost the taxpayer some serious change.

[ETax847]

I see the error in my ways. Sure glad you guys were able to answer my questions. That's why I love this forum. No one is quick to criticize and everyone is extremely helpful. Thanks to all who responded.

[ILLMAS]

Does anyone know if the real estate professional status would be questioned when most of the properties are profitable? I know of a TP that has about 14 properties out of the 14, only 1 has not been rented because it's a big location and the rent is pretty high for the amount of square footage, TP has had no luck for the past 7-8 even though the asking rent has been reduced significant over the years. TP payer is able to pay for the mortgage from the profits of the other properties, but at the end this particular property has a huge loss, and when all the properties are combined there is no loss.

MAS

[jshtax]

Does anyone know if the real estate professional status would be questioned when most of the properties are profitable? I know of a TP that has about 14 properties out of the 14, only 1 has not been rented because it's a big location and the rent is pretty high for the amount of square footage, TP has had no luck for the past 7-8 even though the asking rent has been reduced significant over the years. TP payer is able to pay for the mortgage from the profits of the other properties, but at the end this particular property has a huge loss, and when all the properties are combined there is no loss.

MAS

The IRS does not bat an eye unless there is a net loss. Even if passive the gains would eat up the losses unless there was a combo of passive mixed in but usually you are fine.