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When is a Real Estate Professional Not a Real Estate Professional?

The Internal Revenue Service (IRS) recently released new guidelines regarding the tax status of individuals claiming to be real estate professionals.

According to the IRS, licensed real estate agents and brokers do not always qualify for real estate professional status under the new rules, which mandate that individuals spend no less than 750 hours on qualified real estate activities: developing, redeveloping, constructing, reconstructing, acquiring, converting, renting, operating, managing, leasing, or selling property. This means that those with full-time jobs elsewhere cannot claim to be real estate professionals.

Additionally, losses tied to real estate activities are either passive or materially participating passive, with passive losses deductible only from passive income and materially participating passive losses deductible from other income. Those who use limited partnerships to hold property are not considered to be materially participating, and the agency is increasingly targeting limited partnerships for auditing.

The IRS also is looking to make sure those claiming material participation either work 500 hours per property or aggregate the properties into one 500-hour period, and they are cracking down on those who do not meet this benchmark.

Real estate investors are eligible for $25,000 in deductions from passive income up to $100,000 in taxable income. Real estate professionals do not have dollar or income limits, making the distinction ever-important to the tax planning process.

Posted by Sharon Staley on 07/20/2008 08:51 PM

Comments (9)

irs, real estate professional

9 Comments on When is a Real Estate Professional Not a Real Estate Professional?

Thanks for the info!

07/20/2008 08:53 PM

by Karen Monsour,REALTOR® Broward,Palm Beach,Miami/Dade! 954-464-4194 anytime! (Coldwell Banker Fort Lauderdale Beach)

Oh I am more then Full Time -- heck I am FULL FULL time.. today I went to mow grass at a vacant listing just to make sure it looked great to get it sold .. quickly

07/20/2008 08:58 PM

by Eric Reid Lawrenceville,GA (Renaissance Realty Group)

For once I'd like to see something that is really in our favor instead of them tightening already tight screws!

07/20/2008 09:00 PM

by Sara Homan (Coldwell Banker Ellison Realty Inc)

...those with full-time jobs elsewhere cannot claim to be real estate professionals.

750 hours? That comes to just over 14 hours per week. I do more than that, in a day. Doesn't sound like like very high standards to qualify and should easily be attainable by part-timers. Whether they can be successful at it, part time, is another issue.

07/20/2008 09:06 PM

by Marilyn Katz - ABR, e-PRO - WestportCTProperties.com (Prudential Connecticut Realty)

Is blogging considered a qualified real estate activity? I would argue that it is in effect marketing.

07/20/2008 09:10 PM

by Karl Burger - Pensacola Real Estate News (ERA Beach Ball Realty)

I would like clarificiation on that as well. When is "working" considered "working"? To me, it's a 24/7 job. I had the same question regarding Kentucky's broker qualifcation. You just work at least 20 hours / week for 2 years to qualify to take the exam. That many hours is typically half a work week but how does that fit in with a 24/7 job.

07/20/2008 09:17 PM

by Bill Dunn (Prudential Premiere Realty)

Does Karl spend 14 hours a week blogging. Wow. I wish I had that kind of time.

07/20/2008 09:29 PM

by Russ Ravary - Michigan Homes for sale - Michigan Real estate & Mortgage info (Remerica Hometown One)

Thank you for posting this information. I hope this filters out many of the "new - part time" agents that infiltrated real estate to make a killing. All they did is hurt the established agents by peeling away some of the business they would have gotten. Hopefully the part timers will learn they have no right to claim their deductions and will realize they have to leave real estate to the professional full time Realtors.

07/20/2008 09:40 PM

by Carol Kope (Keller Williams Realty Partners)

I don't spend 14 hours per week blogging. I wish I had that kind of time. But when you factor in blogging time with other real estate time, it all adds up. BTW, I go way over that 750 number without blogging, I was just curious.

07/21/2008 06:18 AM

by Karl Burger - Pensacola Real Estate News (ERA Beach Ball Realty)

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