- Qualification Criteria for Real Estate Professional Status:
- 50% Test: Perform more than 50% of services in real property trades or businesses.
- 750 Hours Test: Log over 750 hours of service in real property trades or businesses.
- Material Participation Test: Actively participate in each rental activity.
- Real Property Trade or Business:
- Definition includes development, construction, acquisition, rental, operation, management, leasing, or brokerage.
- Record-Keeping Requirements:
- Detailed records of hours worked in real estate are essential.
- Contemporaneous daily time reports not mandatory; reasonable means accepted.
- Material Participation Criteria:
- Taxpayer must satisfy at least one of the following:
- Work more than 500 hours in the activity (spouses’ participation combined).
- Do substantially all of the work in the activity.
- Work more than 100 hours with no one else exceeding the taxpayer’s hours.
- Participate in significant participation activities (SPAs) for over 500 hours.
- Material participation in the activity for any five of the prior ten years.
- Material participation in a personal service activity for any three prior years.
- Regular, continuous, and substantial participation based on all facts and circumstances.
- Net Investment Income Tax (NIIT) Relief:
- Real estate professionals may be exempt from the 3.8% tax on passive net investment income if:
- They meet the defined real estate professional test.
- Rental income is derived in the ordinary course of business and the activity is not passive.
- Safe Harbor Rule:
- If real estate professionals participate for more than 500 hours in the current taxable year (or more than 500 hours per year in any five of the previous ten years), rental income associated with the activity is deemed to be derived in the ordinary course of business.
For personalized advice and guidance based on individual circumstances, consulting with a tax professional is recommended.
This article is intended solely for informational purposes and does not constitute legal, financial, or professional advice. Readers are advised to consult professionals in the relevant fields before taking any action to obtain personalized advice.