How to Qualify as a Real Estate Professional for Landlords

Sharing buttons:

landlords know that real estate helps to

reduce tax exposure but you may not know

that if you qualify as a real estate

professional you can pretty drastically

reduce your tax bill by writing off an

unlimited amount of passive losses I'm

Brendan Hall CEO of the real estate CPA

today I'm gonna give you five tips on

how you can qualify it as a real estate

professional before we get started make

sure that you subscribe to our YouTube

channel you'll be notified of future

content releases and if you like what

you're hearing check us out on a virtual

workshop at WWD real estate CPA calm

slash virtual - workshop the first tip

is to understand why qualifying as a

real estate professional is important

under section 469 of the tax code the

general rule is that all rental real

estate activities are passive which

means that the passive losses can only

be offset by other passive income there

are two exceptions to this rule the

first is that if your modified adjusted

gross income is below $100,000 you can

take up to $25,000 of passive activity

losses against your other income if your

modified adjusted gross income exceeds

150,000 dollars that loss allowance is

phased out which leads to the second

exception of potentially treating those

passive losses as non passive and that's

qualifying as a real estate professional

if you currently have passive losses

that have been suspended on your tax

returns comment below with yes if not

comment no this will help me create

better content for the future so the

second tip that I have for you is just

how do we qualify as a real estate

professional first we have to spend at

least 750 hours in a real estate trader

business second more than one half of

our time spent in trades or businesses

must be spent in a real estate trade or

business in which you materially

participate if you meet these two tests

you qualify as a real estate

professional but it's important to note

that qualifying as a real estate

professional does not automatically

allow you to deduct your passive losses

because all you've really done is

overcome the presumption that your

rental activities are passive in nature

and that leads me to the next tip tip

number three you have to materially

participate in your rental activities

and before we get into the actual

quantitative tests of material

participation I first want to tell you

what hours do not count and those hours

are investor hours activities that

qualify as investor hours are reviewing

financial statements preparing investor

reports managing finances and

researching new properties now there are

seven tests - material participation but

the ones that we most often see are that

you spend 500 hours in your real estate

activity your participation in the

activity makes up substantially all of

the participation in the activity during

the year or you participate in the

activity for more than 100 hours during

the tax year and your participation is

not less than that of any other

individual during the tax year so if you

are a real estate professional and you

can demonstrate material participation

you can now write off an unlimited

amount of your passive activity losses

against your other income but an issue

that a lot of landlords have is that

they have multiple properties material

participation is looked at on a per

property level meaning that you have to

demonstrate that you materially

participated in each individual property

as a separate activity unless that

brings me to my next tip tip number four

you can elect to group your rental

activities together as one rental real

estate activity for purposes of meeting

the material participation our

requirement and while this aggregation

election might make it easier for you to

meet material participation hour

requirements it definitely has its

downsides for example once you make the

election when you sell a property in the

group you may not have sold

substantially all of the real estate

activity and as a result you may not be

able to claim passive losses allocated

to the rental property that you sold if

any exists and this can obviously create

a lot of tax problems if it's not

planned for in advance so do be sure

that you consult a CPA before you make

any sort of aggregation election tip

number five is that you need to issue

1099 s if you qualify as a real estate

professional you need to issue 1099 s to

anybody that you paid more than $600 for

services performed during the year with

the exception being that you don't have

to send a 1099 to any corporation unless

they are related to medical or legal

services thanks for watching mixture

you comment like subscribe and share

this content with everybody that you

know I really appreciate it