To qualify as a real estate professional for tax purposes, you need over 750 hours in real estate work where you materially participate, plus more than half your service hours in that same business. Meeting those tests isn't enough: you must also materially participate in each rental property to use losses against other income like W-2 wages.
Chapters
Okay, so this week we're talking about real estate professional status. So let's start off with what is it in the eyes of the IRS? You are a real estate professional if you spend over 750 hours in a real estate trade or business in which you materially participate, and of all the services performed by a taxpayer, over half of those hours are also in a real estate trade or business in which you materially So those are the 2 criteria to be a real estate professional. Now, that alone does not change your rental activities into non-passive activities. Okay? That's the big thing on social is that, oh, just be a real estate professional, that all your losses generated by your rentals can offset your W-2. It's not the case. You have to be a real estate professional and you also have to materially participate in your rental activities. Okay, it's— so that means that you could be a real estate professional and still not be able to use any of the losses in your rentals against your non-passive income. Okay, so you have to materially participate in your rental activities. Now, this can— this is not just— it's not as easy as social media says. It's not even as easy as what I'm saying. Okay, that's why this is educational. You need to talk to your tax advisor to make sure you're doing things properly, tracking your hours, all that kind of thing. And then if you do things right, yes, this is a massive win because normally passive losses generated by rentals, normally that only can offset passive income. And this is one of the ways around that by being a real estate professional and materially participating in your rental activities. Now it gets a little bit hairy if you have a bunch of rentals because you got to materially participate in all of 'em, right? So there's things there that you need to understand and have a tax advisor help you through because there's things called aggregation that you can do. We're not going to get into that right now. The key topic is, the key points here is that real estate professional is when you spend over 750 hours in a real estate trade or business in which you materially participate. And when you look at all the hours of services performed, over half of those hours are also done in a real estate trade or business in which you materially participate. That's step 1. That means you're a real estate professional. To use those losses against your non-passive income, you also have to materially participate in those rental activities. Okay, that combination is where the magic happens. If you have any questions, hit me up, talk to your tax pro. Don't do this on your own. This is all educational, like I said, and it's to help you understand that there are these things out there and these are the questions you want to be asking your tax advisor before the end of the year so you can start utilizing some of these things, right? I'm here. Let's talk soon.
