Real Estate Professional

Your rental real estate activity is not a passive activity, and therefore, not subject to the passive activity rules, if you can be treated as a “real estate professional.”

A real estate professional must satisfy these tests:

1. own at least one interest in rental real estate;
2. more than one-half of the personal services the taxpayer performs in trades or businesses during the tax year are performed in real property trades or businesses in which the taxpayer materially participates; and
3. the taxpayer performs more than 750 hours of service during the tax year in real property trades or businesses in which the taxpayer materially participates.

A real property trade or business includes any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.

Material participation is regular, continuous, and substantial involvement in the operations of an activity. Any work done by an individual in connection with an activity in which he owns an interest is treated as participation.

Taxpayers filing a joint return meet the requirements if either spouse separately satisfies the requirement. The hours of service cannot be combined. Consequently, all of the requirements must be satisfied by one person.

Each rental real estate activity is a separate activity for all purposes of the passive loss rules, unless the taxpayer elects to combine the activities and treat them as one activity. This makes sense if no single activity meets the 750-hour test to qualify for real estate professional status, or if the taxpayer is a passive investor in an activity that generates passive losses that would otherwise be disallowed. Taxpayers make the election to group activities by filing a statement with their original, timely filed return for any tax year in which they qualify. The election is binding for the year made and all future years (even if the taxpayer ceases to qualify for the election) and can be revoked only if there is a material change in the taxpayer’s facts and circumstances.

Tip Qualifying real estate professionals should keep a contemporaneous business diary or appointment book to verify their service. While IRS regulations do not prescribe specific recordkeeping requirements, they also do not allow a post-event "ballpark guesstimate."

Real estate professionals must also complete the "Reconciliation for Real Estate Professionals" in Part V of Schedule E (Form 1040), Supplemental Income and Loss.

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