Qualifying as a Real Estate Professional

Given the interest in the past few days regarding Real Estate Professionals, I thought I’d go through what it is, and why it can make such a difference in the amount of tax you pay.

If you make $100,000 or less and have real estate losses, you can deduct up to $25,000 of those losses against your other income. If you make over $150,000, you can’t deduct any losses. But if you qualify as a real estate professional, there is no limitation on the amount of losses you can take. In order to be a real estate professional, you have to spend more time in real estate activities than any other activity and a minimum of 750 hours. And, the IRS is aggressively attacking Real Estate Professional status.

Read on for strategies for qualifying as a Real Estate Professional.

There are 11 activities that qualify as “real estate activities,” according to IRC § 469(c)(7) & Reg. 1.469-9. The key is that you perform personal services in these activities. That doesn’t mean that you necessarily have to be the one performing the work. You can be supervising, meeting, planning - all of the activities that go into truly running a business.

• Develop. This would include meeting with engineers, architects, planners, equipment operators, construction personnel, drafters, financial professionals, accounting and legal professionals, etc., to discuss and implement development of property. You could also be involved in actually performing some of the development work yourself, if you have such skills, or it could be time you spend hiring, supervising and reviewing the work of other professionals. This development could be anything from subdividing property, with no additional amenities added, to actual construction of real property.

• Redevelop. This would include meeting with engineers, architects, planners, equipment operators, construction personnel, drafters, financial professionals, accounting and legal professionals, etc., to discuss and implement demolition of structures and/or re-development of the property. Again, you could be involved in actually performing some of the development work yourself, if you have such skills, or it could be time you spend hiring professionals, supervising their work, reviewing plans and/or inspecting the work.

• Construct. As before, any meetings, planning, hiring, firing, supervision, or inspection of any phase of construction is considered performing this activity.

• Reconstruct. Just as with “construct,” qualified activities under “reconstruct” are any that are necessary to this phase of building.

• Acquire. Acquiring a property has many phases – meeting with sales people, looking at a whole range of properties, preparing an offering, responding to counter-offers, arranging financing, meeting with insurance agents, inspections and actually closing a property. You don’t need to acquire a property to rack up a lot of hours in this area. Don’t forget to count the time you spend traveling back and forth to the property.

• Convert. Conversion of property is similar to redevelopment or reconstruction, but might have the additional time element of meeting with planning officials. All of that time counts toward time spent in qualified real estate activities.

• Rent. The time spent meeting with your property managers to establish rental criteria, as well as acting as renting agent yourself (including the showing, screening, advertising, etc.), will count as qualified real estate time.

• Operate. If you spend time as a property manager or meet with your property manager, then you will spend significant time as the “operator” of real estate.

• Manage. Similar to “operation” of real estate, if you manage your property, its tenants, prospective buyers, etc., then you are involved in qualified real estate activity.

• Lease. The time spent meeting with your property managers to establish leasing criteria, as well as acting as renting agent yourself (including the showing, screening, advertising, etc.), will count as qualified real estate time.

• Sell. All of the activities involved in selling a property (getting ready for sale, setting up open houses, placing ads, meeting with real estate brokers and prospective buyers) count toward qualified real estate time.