Update on IRS Challenge of Real Estate Professional Status

This post is in: Business, Real Estate
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The IRS started challenging the real estate professional status over two years ago. Since then, we’ve seen a lot of audits, unfavorable audit results and a few court cases.

The real estate professional status allows taxpayers to take full advantage of real estate losses against other income. Without that, your loss is limited if you make less than $150,000 and you can’t take any loss if you make more than $150,000.

No wonder the IRS is after this status!

The key with the real estate professional status is that you spend more time actively involved in real estate activities then you do in any other trade or business. And you need to spend at least 750 hours in active real estate activities. Notice how many times I said ‘active’ or some derivative of it? That’s because the IRS is honing in on how active your activities really are.

They get out the red pen and slash your hours from diary for anything that smacks of passivity. Sitting at your computer looking at properties? NOPE Reviewing reports your property manager gives you? NOPE The IRS wants to see you out of the chair and doing something.

One other way to qualify as a real estate professional is if you are a 5% or more owner in a business that is itself a real estate activity. So, if you’re a real estate appraiser, contractor and the like and you own the company, you’re probably going to qualify. One of the challenges that the IRS tried out was regarding real estate agents. They took the position that only a real estate broker could be a professional.

There haven’t been any cases completely on point on this yet. But, in some somewhat related cases, it looks like Tax Courts may rule against the IRS on this. It’s hard to say exactly though. If you’re a real estate agent, hoping to count those hours as real estate professional status realize you may get a challenge.

There are other items that the IRS wants to see as well: material participation in the property and how you’re holding the property. Plus, if you have your property inside an LLC, they’re going to want to see that your LLC has special language in it that allows you to get the necessary material participation. If you have your property in a limited partnership, you probably are going to lose this one.

One Comment

  1. Linda says:

    I was audited in 2010 and I had to prove I had spent at least 750 hours that year on actively managing my 5 rentals. That meant tracking all my receipts, substantiating time per each day spent at each property, distance I travelled between home and properties, properties and stores where I purchased supplies, etc.

    Fortunately, I did pass because I had the hours and the paperwork signed MANY years ago that allowed me to combine properties in order to get the 750 hours. Had I not signed that form years ago, each property would have had to have 750 hours spent on it.

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