![]() The taxpayer meets the definition of real estate professional test as described above, and.Net Investment Income Tax and Real Estate Professional StatusĪnother benefit of qualifying as a real estate professional is relief from the 3.8% tax on passive net investment income imposed under NIIT if: Based on all facts and circumstances, taxpayer participates in the activity on a regular, continuous and substantial basis during such year.Taxpayer materially participates in a personal service activity 13 for any three prior years or.Taxpayer materially participates in the activity in any five of the prior ten years.Rental or leasing activity is not considered an SPA The activity is a significant participation activity (SPA), and the taxpayer’s total time in all SPAs exceeds 500 hours.Taxpayer works more than 100 hours in the activity and no one else works more than the taxpayer (including non-owners or employees).Taxpayer does substantially all of the work in the activity.12 Participation by children or employees is not counted Unlike the 50% and 750 hours tests, participation of both spouses is counted for material participation. Taxpayer works more than 500 hours in the activity.To be considered a “material participant,” a taxpayer must satisfy at least one of the following: 11 As a general rule, the election is binding until revoked and covers future purchases 10. Material participation is determined separately for each rental property unless the taxpayer elects to treat all interests as a single rental real estate activity. However, all real property trade or business activity is included under the 750 hours test, regardless of whether an election has been made to aggregate the properties into one real property trade or business 9. The 50% test and 750 hours tests must be met by one spouse alone. 7 Post-event "ballpark guesstimates" or unverified, undocumented testimony may be insufficient. Reasonable means for purposes of this paragraph may include but are not limited to the identification of services performed over a period of time and the approximate number of hours spent performing such services during such period, based on appointment books, calendars or narrative summaries. Contemporaneous daily time reports, logs or similar documents are not required if the extent of such participation may be established by other reasonable means. The extent of an individual’s participation in an activity may be established by any reasonable means. ![]() ![]() The IRS requires detailed records to support the hours worked in real estate compared to those worked in other business. Materially participate in each rental activity (“material participation test”).Ī real property trade or business is broadly defined to include real property development, re-development, construction, re-construction, acquisition, rental, operation, management, leasing or brokerage trade or business.Perform more than 750 hours of service in real property trades or businesses (“750 hours test”), and.Perform more than 50% of services in real property trades or businesses (“50% test”), and.To qualify as a real estate professional, a taxpayer must satisfy the following tests: 5 4 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. The remainder is carried forward to be used when the passive activities generate a gain or upon disposal of the property or activity. PALs may be deducted only to the extent of a taxpayer's passive activity income. 3 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). Real estate professional status can provide relief from the passive activity loss limitation rules 1 and the 3.8% net income investment tax (“NIIT”), 2 resulting in significant tax savings. ![]()
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