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Are You a Real Estate Professional?

Whilereading this article on the Inman News website titled “6 Ways to Increase Your Chances of Being Audited,” the first of the author’s six IRS-attracting activities caught my eye: “Be a real estate professional.”

As AEM’s Construction/Real Estate Industry Leader, I often help clients understand what “being a real estate professional” means. Having a good grasp on the rules surrounding the IRS’s real estate professional designation is important for two reasons: 1) If you qualify as a real estate professional, you may be eligible for certain tax benefits, and 2) knowing the rules can help you avoid trouble with the IRS.

So, let’s start by defining a real estate professional. When you think of a real estate professional, you probably picture a real estate agent or broker. But to qualify for the IRSdesignation, you don’t have to spend your days showing properties or hammering up “for sale” signs; you simply need to meet a set of criteria.

According to the IRS, you’re a real estate professional if:

1.  You spend more than half of your working hours on real estate.

This could include any time spent in real property acquisition, conversion, rental, development, redevelopment, construction, or reconstruction. Time spent in the operation, management, leasing or brokerage businesses counts here, too.

2.  You spend at least 750 hours a year (14.5 hours a week) working on real estate.

As you can see, it’s nearly impossible for someone with a full-time job to qualify as a real estate professional.

3.  You own more than 5% of a real estate company (time spent working in this capacity can count toward #1 and #2)

In addition to the rules listed above, there are other things to consider when determining if you’re a real estate professional.

You should also know that your ability to qualify for certain real estate professional tax benefits hinges on whether you identify each real estate activity as stand-alone or elect to group your activities. If you’re married and file a joint return, it’s important to know how your spouse’s activities affect your real estate designation. And if you already identify yourself to the IRS as a real estate professional, it’s never a bad idea to make sure you’re up to date with the latest tax laws affecting real estate professionals.

By understanding these rules and where your status as a real estate professional lies, you can make sure you’re keeping as much of your hard-earned investment income in your pocket as possible. Plus, having your financials in order is never a bad idea—especially if the IRS comes knocking.

Judd Nordquist, CPA, is AEM’s Construction/Real Estate Industry Leader. When he’s not hunting down ways to help clients improve their bottom lines, he’s hunting for pheasants with his trusty canine companion. Judd can be reached at 952.939.3204 or judd.nordquist@aemcpas.com. 

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