Real Estate Professional

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Real Estate Professional

There is a wide variety of job openings in the real estate sector. Real estate professionals, brokers, lawyers, financiers, etc. It’s important to note that the IRS has a different definition of “real estate professional” than your employer’s. Certain tax benefits are available for real estate purchases by qualifying individuals, but only if they meet the requirements of this category.

What Are the Real Estate Professional Tax Benefits?

It’s common knowledge that property owners get certain tax breaks, but perhaps you didn’t know that people who also work in the real estate industry might enjoy even more benefits. By using this designation, investors that meet the requirements can reduce their taxable income by the number of their allowable business expenses, losses, and property depreciation. The losses of a non-professional investor can only be deducted from other types of income, such as rental or capital gains.

What Are the Real Estate Professional Rules?

Publication 925 of the Internal Revenue Service outlines the requirements that must be met to be considered a real estate professional for taxation purposes. A few distinct perspectives may be taken on these regulations, but in general, investors must put in a particular number of hours each year working in the real estate industry. The following is a list of the rules for real estate professionals:

Over 50% rule

The Internal Revenue Service (IRS) stipulates that the first criterion must be met is that more than half of the services carried out during the previous tax year were related to “real estate property trades or companies.”

The phrase “more than 50 rule” refers to the requirement to spend more than fifty percent of your working hours engaged in real estate-related activities. According to the more than 50% rule, in most cases, a person cannot be considered a real estate professional if they have another full-time employment in addition to their real estate career.

More than 750 hours requirements

The second requirement for real estate professionals is that they work in the industry for at least 750 hours a year in some capacity. To give some perspective, the average person working a 9 to 5 job works between 1600 and 1900 hours per year. The 750 hours must be done within the tax year (which runs from January to December); however, the timing of those hours is flexible.

Single taxpayer requirements

Everyone seeking the real estate professional tax designation must meet the requirements above. In other words, you and your business partner won’t be able to pool your hours and get the tax breaks available to real estate professionals.

Each taxpayer must comply annually with the 50% rule and the 750-hour minimum. But there is a special case for married couples who file jointly. Suppose you or your spouse match the following criteria. In that case, your joint income will qualify for real estate professional benefits, even if one of you had a different principal source of income.

Material participation

The IRS utilizes the material involvement test to evaluate if your working hours contribute towards real estate professional qualification. These experiments demonstrate that investors actively participate in real estate commercial activity. You must satisfy one of seven material participation requirements. One popular example is 500 hours of exercise. Since real estate professionals must work 750 hours, this is often employed. List all your enterprises and real estate deals.

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