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IRS Guidance for Real Estate Professionals: What You Need to Know

By Superstein CPA

May 1, 2024

IRS Guidance for Real Estate Professionals: What You Need to Know

IRS Guidance for Real Estate Professionals: What You Need to Know

Understanding IRS guidance for real estate professionals is crucial for anyone with income or losses from rental activities or other real estate investments. Being considered a real estate professional affects the tax treatment of your rental income or losses and can lead to significant tax savings. Let’s break down the ins and outs of the guidance and how it could impact you.

Passive and Active

The IRS distinguishes real estate activities into two categories: passive and active. Rental activities usually fall under passive income, where any losses incurred can only offset passive income. However, if you qualify as a materially participating real estate professional, your rental income or loss is considered active, offering a significant advantage in tax treatment. This shift can substantially lower your tax liability and provide relief during profitable years.

Qualification Criteria – Real Estate Professional

To qualify as a real estate professional for the year, you must meet both of the following criteria:

•Firstly, more than half of the personal services you performed in all trades or businesses during the tax year were performed in real property trades or businesses in which you materially participated.

•Secondly, you performed over 750 hours of services during the tax year in real property trades or businesses in which you materially participated. These real property trades or businesses encompass a wide range, including real property development, construction, acquisition, conversion, rental or leasing, operation or management, and brokerage.

Establishing Material Participation

Once you’ve established that you qualify as a real estate professional, the next step is establishing that you materially participated in managing your rental properties. This involves meeting specific criteria detailed by the IRS.

No Certification Needed

Contrary to popular belief, you don’t need a particular certification or licensure to qualify as a real estate professional. Whether you’re a real estate agent, investor, or developer, as long as the majority of your time is dedicated to real estate-related activities, you qualify for this designation. Personal services performed as an employee may not count towards the 750 hours test unless you are a significant owner (5%) of the employer.

How Superstein PA Can Help

At Superstein PA, we understand the complexities of real estate taxation and are here to guide you through the intricacies of IRS guidance. Our experienced team of tax advisors specialize in real estate taxation, offering comprehensive solutions tailored to your needs.

Reach out to Superstein PA to learn more about this topic and how we can help you.

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