Have A Rental Property? Can You be Considered A Real-Estate Professional?

If you are a real-estate professional, under the IRS guidelines, you can qualify for better deductions with regards to your rental property.

Under the general rules for rental real estate, losses are only deductible up to a maximum of $25,000 per year. This maximum deduction can also be reduced, if your adjusted gross income exceeds $100,000 (50% reduction of the amount that your AGI exceeds $100,000, but not below zero). Since many taxpayers that own rentals, have incomes that exceed $100,000, they are losing out on deductions for their rental loss.

If, however, you are considered a real estate professional, these passive loss rules do not apply. Losses can be deducted beyond the $25,000, regardless of the income level the taxpayer is at.

A taxpayer qualifies as a real estate professional for a particular tax year if:
… more than half of the personal services the taxpayer performs during that year are performed in real property trades or businesses in which the taxpayer materially participates, AND
…the taxpayer performs more than 750 hours of services during that year in real property trades or businesses in which he materially participates.

A real property trade or business is any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing or brokerage trade or business.

“Personal services” means any work performed by an individual in connection with a trade or business, but not as an investor. Services performed as an employee don’t count, unless the employee is a more-than-5%-owner of the employer.

These rules are applied as if each interest of the taxpayer in rental real estate were a separate activity. However, a taxpayer can elect (by filing a specified statement with the taxpayer’s original income tax return) to retreat all interests in real estate as one activity. In other words, absent the election, each interest in rental real estate is treated as a separate activity. The election makes it easier to meet the material participation requirement by allowing the taxpayer to aggregate his participation in all those activities. The election is binding for the tax year it’s made and for all future years in which the taxpayer qualifies.

If you have any questions regarding whether or not you can be considered a real estate professional, please give us a call so we can discuss.
 
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