Archive for February, 2012
Alright, we’ve talked about what you need to do to qualify as a real estate professional for tax purposes. Rule one was the 750 hour rule. Rule two was the material participation rule. The final rule that we’ll be talking about today is what I call the 50% rule and for a lot of people, it’s the one that trips up most people and disqualifies them from being a real estate professional. How the 50% rule works is, you have to spend more then 50% of the time you spend on personal services for the year in real estate and rental real estate trade or business activities.
Where most people run into problems is when they have a full time job. If you spend 2,000 hours at your job, you then have to spend 2,001 hours on real estate to qualify as a real estate professional. That doesn’t leave people too much time to sleep. And these people (those who get a W-2 and then claim to be a real estate professional) are some of the people the IRS is targeting. So look at the 750 hour as the minimum but what you really need to get to is a match of time you put into your other businesses or jobs.
I’ll have one more post on the real estate professional status before I move on to something else. It’ll be mostly some planning ideas.
A couple of weeks ago, I touched on qualifying as a real estate professional and I talked about the 750 hour test. Rule two is that the 750 hour test has to apply to activities in which the person materially participates. The catch here is you have to look at each activity individually (sort of, I’ll get to the exception in a minute).
In order to materially participate, you have to meet one of the following requirements:
1) The taxpayer spends 500 hours on the property.
2) The taxpayer does most of the work.
3) The taxpayer works more then 100 hours and nobody else works more hours then he does (this is the one most people shoot for).
4) The taxpayer has several activities and spend in which he spends 100-500 hours each and the total time spend is 500 hours.
5) The taxpayer materially participated in an activity for five of the last ten years.
Where you run into the most problems is when you have multiple properties. Fortunately the IRS lets you make an election to group all of your properties together as one activity. You have to make a formal election on your tax return though and if you’ve never done this and have put yourself out as a real estate professional, you do have some risk. The election isn’t all that complicated, but if you’d like a free template, feel free to send me an email or a Facebook message.