Posted by JOHN HASLACH, CPA, MST on May 16, 2008 at 07:11:51:
The 500 hour rule is related to Material Participation.
To deduct fully real estate losses, you must meet the real estate professional rules.
IRS Real Estate Professional Qualification? - Posted by Thomas
Posted by Thomas on May 02, 2008 at 16:17:39:
I am researching rental property and trying to determine whether or not I fully qualify as a full time real estate professional. This is important in determining how much (i.e. over $25,000) loss can be deducted from ordinary income in any one year.
I am unsure because I am a licensed real estate broker in both California and Nevada, but my primary business is a commercial mortgage broker/banker out of California. I see that the tax law expressly excludes mortgage brokers. My question then is this because most mortgage brokers (residential) do not hold a real estate brokers license? Specifically, I arrange debt financing for commercial projects. From time to time we act as a selling or buying broker and also arrange equity investments in commercial property. However, our primary business is procuring debt financing. Does the simple fact that I have an active real estate broker license and that I am engaged in the real estate field qualify me as a real estate professional? Or does the mortgage broker exclusion also apply to commercial mortgage brokers irrespective of whether or not they are licensed real estate brokers as well?
Second, if I do qualify as a full time real estate professional am I still limited to only taking loss deductions if my income is under $100,000?
Thank you in advance for the help. I really appreciate it.
Thomas
Re: IRS Real Estate Professional Qualification? - Posted by JOHN HASLACH, CPA, MST
Posted by JOHN HASLACH, CPA, MST on May 12, 2008 at 10:27:56:
To be a real estate professional for tax purposes, you need to work 750 hours in a real estate business and the hours must be at least 1/2 of the total hours you work. So, to get the minimum 750 hours, you need to work 1500 hours. You cannot count the hours worked for an entity if you are less than a 5% owner. You also need contemporaneous records of your hours.
Re: IRS Real Estate Professional Qualification? - Posted by Maarik
Posted by Maarik on May 05, 2008 at 21:16:38:
Thomas-
The requirements for qualifying as a Real Estate Professional are two-fold with qualifying hours necessary in the Real Estate Profession & in the specific rental activity which you are carrying on.
I can give you this generality - if you have one rental home - it is 99% likely that you will NOT qualify. The fact of your possessing a broker’s license is just one of many necessities.
Penny gave good advice regarding the ATG’s.
Re: IRS Real Estate Professional Qualification? - Posted by Penny
Posted by Penny on May 04, 2008 at 14:37:22:
Check with your CPA on this. From what I’m hearing, the IRS is scrutinizing the real estate professional claims and there are pending cases involving real estate agents where the IRS is challenging the REP status. Material participation in the rental activities, entity ownership and spending more time on REP than other employment are key issues at hand, as I read it.
See the IRS website below on rental losses:
http://www.irs.gov/businesses/small/article/0,,id=146326,00.html
Also, if you do a search on the IRS website for audit technique guides on the real estate professional, you should be able to find out what sort of questions auditors are asking. That, along with your CPA, should give you more guidance on this.
Good luck!
Re: IRS Real Estate Professional Qualification? - Posted by Maarik
Posted by Maarik on May 15, 2008 at 20:37:06:
John-
You are forgetting the 500 hour requirement in each rental activity.
Maarik-
Re: IRS Real Estate Professional Qualification? - Posted by jimi
Posted by jimi on May 06, 2008 at 04:27:13:
Here’s the link to the audit guide:
http://www.irs.gov/businesses/small/article/0,,id=146318,00.html