Do I Qualify as a Real Estate Professional under the IRS tax guidelines?

Generally, rental activities are passive activities even if you materially participated in them. However, if you qualified as a real estate professional, rental real estate activities in which you materially participated aren’t passive activities. For this purpose, each interest you have in a rental real estate activity is a separate activity, unless you choose to treat all interests in rental real estate activities as one activity. See the Instructions for Schedule E (Form 1040 or 1040-SR), Supplemental Income and Loss, for information about making this choice.

If you qualified as a real estate professional for a given tax year, report income or losses from rental real estate activities in which you materially participated as nonpassive income or losses. Furthermore, you must complete line 43 of Schedule E (Form 1040 or 1040-SR). If you also have an unallowed loss from these activities from an earlier year when you didn’t qualify, see Treatment of former passive activities under Passive Activities, earlier.

Real Estate Professional Qualifications

You qualify as a real estate professional for the year if you meet both of the following requirements:

• More than half of the personal services you performed in all trades or businesses during the tax year were performed in real property trades or businesses in which you materially participated; and
• You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated.

5% Ownership Rule

Only count personal services you performed as an employee in real property trades or businesses if you were a 5% owner of your employer. Additionally, you will be considered a 5% owner if you owned (or are considered to have owned) more than 5% of your employer’s outstanding stock, outstanding voting stock, or capital or profits interest.

If you file a joint return, don’t count your spouse’s personal services to determine whether you met the preceding requirements. However, you can count your spouse’s participation in an activity in determining if you materially participated.

Real Property Trades or Businesses

A real property trade or business is a trade or business that does any of the following with real property:

• Develops or redevelops it.
• Constructs or reconstructs it.
• Acquires it.
• Converts it.
• Rents or leases it.
• Operates or manages it.
• Brokers it.

If you have questions about whether you qualify as a real estate professional or are under an IRS examination, contact a tax attorney to discuss.