As the new tax season approaches more and more real estate investors are wondering whether or not they qualify as what the IRS calls a “real estate professional.” If you’re new to real estate investing and are curious to find out whether you fall under this category, keep on reading. You’ll be surprised to find out that there are actually 3 different categories you could possibly fall under.
Unfortunately not every investor will fall under one of these three categories, there are some requirements that must be met in order to ‘check off’ one of these boxes on your taxes. You may only qualify if you’re an investor who has multiple rental properties and makes less than $150,000 a year in adjusted gross income.
In addition to this, in order to be considered a “real estate professional” you would have also had to have 1.) spent a majority of your time in real estate property business. and 2.) have spent a minimum of 750 hours in real estate property business and rentals.
For many this would require that you make real estate and real estate investing your full-time job, as stated by BiggerPockets.com, “if you work a full-time job, you won’t qualify as a real estate professional because you’d have to work more hours in your real estate business than you do at your job for the year.” This is most definitely a career within itself, consider this before you take on the role.
With that being said, there are actually a number of amazing tax benefits that come along with the three categories, let’s take a look at the breakdown of all three categories so we can determine which is better suited for you.
1.“Passive Investor” – of all three designations this one is the least beneficial and unfortunately only allows the taxpayer the ability to only deduct passive losses against passive gains.
2.“Active Investor” – of all three designations this one is the easiest to qualify for, if you are simply involved in the decision making for the real estate investment and you’re income level is below $150,000 for married couples or $100,000 for single individuals, you will qualify. Qualifying under an “active investor” allows you the ability to deduct an additional $25,000 of losses against ordinary income.
3.“Real Estate Professional” – as mentioned above, this may be the hardest designation to qualify for. Being classified as a “real estate professional” requires a minimum of 750 hours of real estate work. Now what qualifies as “work” is pretty unclear, many will argue that doing their homework by searching for listings should qualify as hours towards those 750, but unfortunately it does not. But the upside to putting in all that work is that being a “real estate professional” allows you the ability to deduct 100% of all real estate losses against ordinary income.
Which designation do you fall under?
Before you go to check that box on your tax forms make sure you consult with a professional who can look over your income and investments with you to insure you’re getting the most from your investments.
To learn more check out BiggerPocket.com‘s article “What Investors Should Know About Qualifying As a “Real Estate Professional” For Tax Purposes” and Markjkohler.com‘s article “How to become a Real Estate Professional for Tax Purposes.”