Why a Real Estate Professional Status Can Save You on Taxes

The real estate professional (REP) designation by the IRS is actually one that you want to use, if it’s applicable. But, make sure you qualify! The IRS is paying a lot of attention to this one.

If you have real estate losses and you make under $100,000 a year, 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 of the losses. The amount of the loss that you can take out phases out between $100,000 and $150,000.

The exception is if you or your spouse is a REP.

There are three steps to taking the REP deduction on your tax return:

  1. You or your spouse must individually have 750 hours or more in qualifying real estate activities and you or your spouse must spend more time in that activity than any other,
  2. You and/or your spouse have to materially participate in the activity, and
  3. Each property must individually qualify.

Real Estate Professional Hours Test
You must have more than 750 hours in qualifying real estate activities and more hours in this real estate business than any other trade or business.

First of all, you need to own 5% or more of the real estate business you’re using to qualify. If you’re an employee and have no ownership in the company, the hours won’t count.
The real estate qualifying business must be involved in real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing or brokerage trade or business.

That means your eligible business will most likely be one of the following: real estate contractor, rental property owner, property manager or a real estate brokerage business. It does not include real estate appraisers and loan brokers.

If you’re married, only one of you can qualify. You can’t split up the function.

In tomorrow’s blog, we’re going to talk about the other qualifications necessary to legally take the real estate professional status on your tax return.

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