The Real Estate Professional Loophole

There are many advantages of being a real estate professional for tax purposes. And, if you think you need a real estate license to be considered one, think again. The IRS allows you to claim real estate professional status if you meet certain requirements, allowing you to save at tax time.

Overview

Normally, if you make $100k or less in any given year, you are able to deduct up to 25k of real estate losses, which result when rental expenses exceed rental revenue. If you make between $100k and $150k, you can only deduct part of your losses.

Now, if you make above $150k, you are usually not allowed to offset any of the losses against your other income (i.e., your W-2 income). Instead, these passive losses are carried forward, indefinitely, to be offset against future rental gains, reported when rental revenue exceeds rental expenses.

If you are not considered a real estate professional, your rental activity is considered “passive” and any losses are therefore not allowed to be offset against non-passive income such as income earned from your job.

Advantages of qualifying as a real estate professional

There is a way around that, though, if you qualify as a real estate professional and the IRS will allow you to deduct your rental losses without limitation, even if you make above the $150k threshold.

So, who exactly is a real estate professional and how can you qualify?

Criteria to qualify as a real estate professional

A real estate professional is any person (or spouse) who meets the following two requirements set by the IRS. Both criteria must be met in order to qualify:

#1 More than 50% of the total working hours must be spent in real estate.

#2 A minimum of 750 hours per year must be spent in real estate activities.