What is the Real Estate Professional Exemption
Real estate rental activities are automatically passive for all taxpayers except qualifying real estate professionals. If you qualify as a real estate professional, rental real estate activities in which you materially participate in are not passive activities. This exception allows those that qualify to report income as nonpassive income or a loss as a nonpassive loss from rental real estate activities
Real Estate Professionals are professionals that participate in a trade or business that does any of the following with real property:
- Develops or redevelops it
- Constructs or reconstructs it
- Acquires it
- Converts it
- Rents or leases it
- Operates or manages it
- Brokers it
Real Estate Professional Qualification
To meet the IRS Real Estate Professional exception you must meet the following activity tests for the tax year:
- 1. You perform more than half of your business working hours in the real estate business.
- 2. You perform more than 750 hours of this type of work during the year.
For married couples filing jointly, both the “50% of services test” and the “750 hours test” must be met by one of the spouses individually, without regard to the other spouse’s services.
A closely held corporation can qualify as a real estate professional if more than 50% of the gross receipts for its tax year came from real property trades or businesses in which it materially participated.
Rental Real Estate Activity Material Participation
If you qualify as a real estate professional, you must still show that you materially participate in your rental real estate activities to avoid passive activity treatment. If you have more than one rental real estate activity and choose to aggregate all of your rental real estate activities, total participation in all of the activities is combined in applying the material participation tests. If an election to aggregate has not been made, material participation must be determined separately for each rental property.
Passive Loss Limits for the Real Estate Professional Exemption
There are no limits to being able to use rental property losses if you are a real estate professional. The real estate losses are deductible against any other form of income. You still need to show that you materially participate in your rental real estate activities to avoid passive activity treatment.