@Mark818 thank you for the question. I think we need some background here.
Real estate professional status can provide relief from the passive activity loss limitation rules and the 3.8% net income investment tax (“NIIT”), resulting in significant tax savings.
Rental activities are, per se, passive. Passive activity loss (“PAL”) rules limit the ability to offset net losses from passive activities (like rental income) against other nonpassive sources of income (like wages). PALs may be deducted only to the extent of a taxpayer's passive activity income. The remainder is carried forward to be used when the passive activities generate a gain or upon disposal of the property or activity. However, a real estate professional who materially participates in a real property trade or business is not subject to the PAL.
limitation rules and may use rental losses to offset other sources of nonpassive ordinary income.
So, what is the Real Estate Professional Test:
To qualify as a real estate professional, a taxpayer must satisfy the following tests:5
- Perform more than 50% of services in real property trades or businesses (“50% test”), and
- Perform more than 750 hours of service in real property trades or businesses (“750 hours test”), and
- Materially participate in each rental activity (“material participation test”).
The IRS requires detailed records to support the hours worked in real estate compared to those worked in other businesses. The extent of an individual’s participation in an activity may be established by any reasonable means. Contemporaneous daily time reports, logs or similar documents are not required if the extent of such participation may be established by other reasonable means.
Now to your actual question. As a real estate agent, I am assuming you are filing a Schedule C. This is already an active business. I am assuming you also have rental properties on a Schedule E, where the test above is shown. While you are a real estate professional, you may not be one for purposes of the passive activity limitations. If you meet the test above then you may have a higher risk of audit. I would ask you to consider looking at the test carefully to see if you truly meet the standards. If you have a full time W-2 job an additional 750 hours may be a difficult standard to meet.
All the best,
Marc T.
TurboTax Live Select Time Tax Expert
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