How to qualify as a real estate professional on your tax return

Man waiting to be a real estate professional

If you own rental property or are involved in real estate investments, you may be able to take advantage of the tax benefits associated with being a real estate professional. However, in order to qualify as a real estate professional under IRS rules, you must meet certain requirements. In this article, we will discuss the IRS requirements for being a real estate professional and how it can help you take active losses.

A real estate professional is someone who spends more than 50% of their working time in real estate activities and more than 750 hours per year in real estate activities. Real estate activities can include:

  • Development
  • Acquisition
  • Management
  • Brokerage
  • Construction
  • Rental

If you meet the IRS requirements for being a real estate professional, you may be able to deduct your rental losses against your non-passive income.

Passive vs. Active Losses

There are two types of losses associated with rental property: passive and active. Passive losses can only be deducted against passive income, such as rental income. Active losses, on the other hand, can be deducted against non-passive income, such as salary or business income.

If you are not a real estate professional, your rental losses are considered passive losses. This means that you can only deduct them against your passive income, and any unused losses must be carried forward to future tax years.

If you are a real estate professional, your rental losses are considered active losses. This means that you can deduct them against your non-passive income, and you can use any unused losses to offset future non-passive income.

How to Qualify as a Real Estate Professional

To qualify as a real estate professional, you must meet two requirements:

  • More than 50% of your working time must be spent in real estate activities – This means that you must spend more time on real estate activities than any other activity, including your primary job. The 50% requirement is based on both time and material participation.
  • More than 750 hours per year must be spent in real estate activities – This includes all real estate activities, such as property management, acquisition, development, and rental activities.

It is important to note that you must meet both of these requirements to qualify as a real estate professional. If you fail to meet either requirement, you will not be able to take advantage of the tax benefits associated with being a real estate professional.

Conclusion

If you own rental property or are involved in real estate investments, becoming a real estate professional can provide significant tax benefits. However, it is important to meet the IRS requirements for being a real estate professional in order to take advantage of these benefits. By spending more than 50% of your working time on real estate activities and more than 750 hours per year on real estate activities, you may be able to deduct your rental losses against your non-passive income, providing you with a valuable tax benefit. As always, it is recommended to consult with a qualified tax professional to discuss your specific situation and determine the best course of action.


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This tax information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Booked Financial LLC recommends that you consult with a qualified tax advisor, CPA, financial planner, or investment manager.

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