Real estate pro status: properly qualify clients, minimize audit risk, maximize tax savings

You’ve likely encountered clients who assume they qualify as real estate professionals, but assumptions alone won’t hold up under IRS scrutiny. You must accurately determine who meets the material participation and hourly thresholds under §469.

With the right guidance, you can help clients implement grouping strategies, maintain proper documentation and make key elections to transform otherwise non-deductible passive losses into allowable deductions.

Below, you’ll find a few of the top questions and answers from a recent webinar on the topic. View the on-demand version of this webinar now for immediate access to the full recording and entire list of Q&As.

Q: What are the three tests to meet real estate professional status?

A: The taxpayer must (1) spend more than 50% of their personal service time in real property trades or businesses, (2) work more than 750 hours in those activities and (3) materially participate in each rental property, unless a grouping election is made.

For married filing jointly (MFJ) returns, you can’t combine both spouses’ time for the first two tests. However, once real estate professional status is established, both spouses’ time counts toward material participation.

Q: Is real estate professional status permanent once achieved?

A: No. Real estate professional status is determined annually. A taxpayer may qualify in one year but not the next if their facts or time commitments change.

Q: What activities count toward the 750-hour rule?

A: Only the time the taxpayer personally spends on real property trades or businesses counts. Qualifying activities include repairs, rent collection and property oversight. Time spent on passive investment activities, such as reviewing financial reports, doesn’t count.

Q: Do hired contractors’ or property managers’ hours help meet the “most hours” material participation test?

A: No. In fact, their hours count against the taxpayer in that test. To qualify, the taxpayer must show they spent more time on the activity than any other individual, including paid help.

To learn more about the tax considerations for real estate professionals, watch our on-demand webinar. NATP members can attend for free, depending on membership level! If you’re not an NATP member and want to learn more, join our completely free 30-day trial.