Real Estate Professional Status?
I own two 4-plex units. They are professionally managed by a real estate management company. I live about 90 miles from properties. My understanding this would be passive income and the amount of losses you could take was limited by the IRS. I hold these properties in my own name with liability insurance. I read if you are a real estate professional, the limit on the losses are far more flexible. Is that correct? Also, my job is to acquire and facilitate paperwork for polluiton credits for companies building power plants, gas stations, etc. The credits are required for the permitting process by the government. Without thes credits the permit to build would not be complete, and would not be issued in certain highly polluted areas of the country. My question is: The fact I work on acquiring credits required for permitting process, am I eligible to claim to be a real estate professional for tax reasons?
Thank you in advance for any comments to help me understand this tax code and limit my taxes.
I am inclined to believe that facilitating the trade & purchase of pollution credits would not qualify as a real estate professional because you are not directly involved in the real estate end of the process. In my view, this is kind of like saying that a person who drives a truck for the lumber yard built the house.
Also, (assuming that you do not own the company) as simply an employee of a "real estate trade or business" you must be at least a 5% owner of the business to qualify.
Here are the guidelines for determining if you qualify. (Note the definition of real estate trade or business in the second section)
Taken from TurboTax 2003 help:
You are considered to be a real estate professional if:
1) More than one half of the personal services you provided during the year were performed in a real property trade or business in which you materially participated; AND
2) the number of hours in which you materially participated in this real property trade or business was more than 750 hours; AND
3) you must materially participate in each rental real estate activity unless you filed ain election to group all rental real estate activities as one (and materially participate in that activity).
For joint return purposes, the eligibility requirements are considered met if either you or your spouse satisfy the requirements.
also:
To be a qualified real estate profesisonal, an individual whose losses from "passive activities" are treated as non-passive, you must spend more than half of your working time, and no less than 750 hours per year, in the real estate buisness.
Your participation in the buisness must meet the material participation standards. You can't be a passive investor and meet this standard.
If you are an employee in a real estate buisness, you must be at least a 5 percent owner to qualify as a real estate professional for the purposes of this rule.
A "real property trade or business" means any real property development, redevelopment, construction , reconstruction, aquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.
Most people who own rental property but who are not performing services in any other real estate buisness will not qualify for this benefit because they will not spend sufficient time managing their rentals in comparison to time spent in other business interests.
also:
Material participation means regular, continuous and substantial participation in the operation of your buisness activity throughout the year. You must spend a minimum amount of time actually working in that business.
You can meet the material participation standard by meeting any one of the following minumum standard tests:
Participate in the activity for more than 500 hours during the year.
Be the only person who substantially participates in the activity, including other people who do not have an ownership in the activity.
Participate in the activity more than 100 hours during the year and make sure that no one else participates more than you do, including people who don't have an ownership in the activity.
If any of the above situations applied to you in any five of the last ten years, you are deemed to have materially participated this year.
If you materially participate in a "personal service" activity (child care, consultant, real estate agent, etc.) for at least three years, you are a material participant for life.
However, your participation in managing the activity does not count in determining whether you materially participated if anyone other than you received compensation for managing the activity or if anyone spent more hours during the year than you performing services in the management of the activity.
If you are married, your spouse's involvement in the business is included along with yours in the 500 and 100 hour minimum requirements.
The work you performed must have been done at the time you owned an interest in the activity and must have been the type that an owner would customarily do in that type of activity.
In case you were wondering: 500 hours is 63 eight hour days. 100 hours is 13 days.
It's a lot to weed through, but I hope it helps.
-rup
[ Edited by rup on Date 02/24/2004 ]