Plano TX – What does the IRS Consider to be a Real Estate Professional and the Impact on Taxes

In this week’s installment in our series of taxation and investing in Real Estate we will discuss who qualifies as a Real Estate Professional in the eyes of the IRS and what does it mean to be a Real Estate Professional.   Generally, if I ask any taxpayer who comes into my Richardson TX tax office who owns investment real estate if they are a Real Estate Professional, they will tell me YES, but who actually qualifies under IRS rules.


What is a Real Estate Professional?

There are two tests that must be met to qualify as a Real Estate Professional for tax purposes and the taxpayer must meet BOTH of the requirements:

  1. They must perform 750+ hours of service during the year in real property trades or business (More Below),
    1. Must be performed in Real property trades or business
    2. Must materially participate
    3. On a joint tax return, only the time of the qualifying taxpayer. Not the spouse
  2. More than 50% of all personal service income for the year is in real property trades of business.
    1. Personal Service Income is income earned for services including via W-2 and 1099-Misc
    2. To qualify for Real Estate Professional purposes, the income received must be payment for services rendered by the employee-owner of a real estate business. In this example a real estate agent’s income would not qualify (if not an owner) but a broker’s income would.


Benefits of being considered a Real Estate Professional

The benefit is when a Real Estate Professional participates in a Real Estate Activity where they are considered to have material participation.   There are three basic categorization of Real Estate Investors –

  1. Passive Investor where a taxpayer can only deduct the passive loss from the real estate venture to the extent of any passive gains,
  2. Active Investor, where a taxpayer may be able to deduct up to $25,000 (may be limited by AGI on the return).
  3. Real Estate Professional with Material Participation where the taxpayer can deduct 100% of losses (including depreciation) against any type of income on their tax return.


Do you Need Help?

If you would like help from a firm that specializes in working with realtors and real estate investors, as well as helping those who have IRS problems solve their problems, please give us a call at (972) 821-1991 or send me an email at