Real Estate Professional
Real estate professionals can invest in real estate without the passive activity loss limitations that ordinary real estate investors are subject to.
Commonly referred to as Section 469 and Passive Activity Loss
Do I Qualify for the Real Estate Professional?
If you qualify as a real estate professional, your real estate investments will not be subject to the passive activity loss rules, meaning you can use real estate losses to offset and reduce your taxable income.
2022 Real Estate Professional Details
There are many tax advantages to investing in real estate, but it also comes with certain drawbacks. Among those drawbacks are limitations in deducting current year real estate losses in order to offset the gains from ordinary income.
Real estate investment is considered a passive activity, and as such, it is subject to the passive activity loss rules. Under IRC Section 469, the IRS’s passive activity loss rules prohibit the use of passive losses to offset income from activities that the investor is not actively (or “materially”) involved in. But if you, or your spouse, qualify as a real estate professional, your real estate investments will not be subject to the passive activity loss rules.
You do not have to be a licensed real estate agent to be considered a real estate professional, but there are specific requirements.
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•Reduces taxable income
•Eliminates passive loss limitations
•You must document your hours worked as a real estate professional
•May increase the chance of an audit, particularly if you work other jobs
Assumptions When Taking the Real Estate Professional
Requirements to Claim the Real Estate Professional
To be considered a real estate professional, each tax year, you must meet the following two requirements:
•More than 50% of the personal services you perform in all businesses during the year must be performed in a real estate business in which you materially participate.
•You must work at least 750 hours in a real estate trade or business.
Business Entities That Can Claim the Real Estate Professional
The material discussed on this page is meant for general illustration and/or informational purposes only and is not to be construed as investment, tax, or legal advice. You must exercise your own independent professional judgment, recognizing that advice should not be based on unreasonable factual or legal assumptions or unreasonably rely upon representations of the client or others. Further, any advice you provide in connection with tax return preparation must comply in full with the requirements of IRS Circular 230.