Yesterday, I talked about the tax benefits of being a real estate professional. Here’s what it takes to qualify.
If you are single or married, filing jointly, there are 3 tests you need to pass. If you are married, filing separately, you cannot use the real estate professional status.
#1: You (or your spouse if married filing jointly) must get 750 hours in real estate activities and more hours in real estate activities than any other business. You can’t combine hours with your spouse. If it’s your spouse, your spouse can’t use your hours to help. It’s one and one alone.
#2: You (and/or your spouse if married filing jointly) must materially participate in the property. If you don’t have a property manager, that means one of the following:
500 hours of activity,
100 hours of activity and more than anyone else, or
more than everyone else combined.
If you have a property manager, only the 500 hour test will qualify. This has to be some kind of real estate activity directly with the property.
#3: Each property must qualify individually. You can make an election to aggregate the properties, which means that all of the properties then can qualify together. Instead of 500 hours per each property, it’s just 500 hours total.
However, there can be a downside to aggregation when you sell at a loss.
Don’t enter into any of these deals without talking it through with an expert.