Does the IRS Think You’re Active Enough When it Comes to Your Real Estate?

This post is in: Business, Real Estate
No Comments


Yesterday we talked about Real Estate Professional activity losses and how the IRS lost a significant Tax Court case when it comes to real estate activity itself.

Now the focus seems to be on participation. And unfortunately, there is still a lot of confusion when it comes to participation. Part of the problem is that there are TWO standards for real estate participation: active and material.

Material & Active Participation

The latest round of audits seems to be focusing on the definitions of material and active participation. In the case of the Real Estate Professional (REP) deduction, you need to have material participation. That means you have to have 500 or more hours of activity per property per year. This is a standard that is completely separate from the Real Estate Professional hour requirement. Some of the hours could do double duty, but for material participation

If your real estate qualifies as a business or you make less than $100,000, you need only meet the lesser standard of active participation.

Unfortunately, a lot of people either completely forgot about the material participation standard as well if they filed as REP or if they made under $100,000, never thought anyone would ever question the ‘automatic’ $25,000 deduction allowance.

Active participation means you spend 100 hours or more in active participation on the property. Material participation means you spend 500 hours per property per year (unless you make the aggregation election).

Before you take a Real Estate Professional deduction, make sure you meet ALL the rules. We’ve just updated our highly popular “Tax Strategies for Real Estate”. You’ll find the details of what it takes to legally take the Real Estate Professional deduction plus strategies to create even more write-offs.

Leave a Comment