REPS 04: How the IRS Audits the Real Estate Professional Status & What to Do to Protect Yourself

[@OhioTreasures]

So I should just buy a go pro and wear it for any activity with the rental and have hours of video proof. Seems like alot but in our situation, I own the home next door and work part time 1099 my husband works full time 10 months a year in construction. We can do everything involved from a roof to landscaping ourselves.

[@maxicanamerican2023]

Where could we get a good time log for the “ Real Estate Pro “ ???

[@jaelskincarestudio407]

Can the log be in paper?

[@mtigress4589]

I really appreciate how you are being realistic about REP vs other channels pushing the status and borderline being promoters. It's sad when the taxpayers have to pay penalties for shady advice.

[@mtigress4589]

Lol. I said the last part right before you said borderline malpractice. Love it.

[@sandramcewan4652]

@Brandon Hall you mentioned multiple times. that education and research doesn't count towards hours. Are you referring to 750 hour or 500 materially participation hours? Thank you!

[@Jesvalles]

So.... What does count for material participation if not book keeping, accounting, etc ... Do I have to literally swing a hammer every time?

[@rachels7252]

Pretty much yes. I ask myself if what I did was integral to the operation of my rental. Screen tenants, write the lease, go over to the property for leaking kitchen sink, do repairs, go to Home Depot to buy replacement part for leaking kitchen sink, etc. For local rental, it's easier to self manage and meet material participation.. For out of state rental, no, my property manager does all the work so talking to my PM isn't material participation - they said managing the PM doesn't count.

[@virciviliumrerumperitus8101]

What about aggregated properties located in different states? Can the loss in one state impact the “income” on a property in another state per state income taxes?

[@raz260]

How can a real rate professional qualify to use limited partner losses in a syndication for other properties and other income sources?

[@nicolejenkins3202]

I am taking the courses to get my real estate license currently. So the time I’m taking to take those courses does NOT count toward the hours?

[@veronicagonzales4781]

Is this the same thing as qbi safe harbor?

[@sherrysmith6432]

If I had a long-term rental for the first 5 months of the year and then I converted that rental to short term rental (less than 7 days) effective June 1, does the "hours test" towards the Real Estate Professional start 1/1/2023 or would it start when I started my short term rental? Meaning will I have to prove I was a real estate professional the whole year?

[@BethWardecki]

I have so many questions... is there someone i can chat with? or email with?

[@alliesteam9776]

To clarify so if person has more than 5 percent of a real estate company which does variety of real estate activities including property management, and the person is an officer of the real estate company then what? ,

[@tinariley5389]

Why does research looking for a property not count when one of the businesses in the IRS tax code is Acqusition? You have to look on zillow and view properties to buy them. If you buy 4 in a year you look at 100s of properties to close on 4 which all takes time ....

[@mtigress4589]

Acquisition as a profession to count towards the 750 hours would most likely be someone that is being paid by a third party to find properties for them. Searching properties for yourself is not really a business on it's own. The business doesnt exist until you buy the property.

[@JakeRandolphMarketing]

Does the 100 hour test not apply with a property manager even if its a short term rental?

[@TheRealEstateCPA]

Its 100 hours and more than anyone else. If you have a PM, you have to out work them.

[@JakeRandolphMarketing]

@@TheRealEstateCPA The PM company that is running the house I'm buying is refusing to time track themselves

[@hdcs-higherriskdepositcomp3107]

Very helpful, thanks. A few questions: 1. When a landlord does the property management themselves, is the 100 hrs of material participation in an individual property generally viewed as more credible? 2. When the RE professional has rentals and is an active real estate broker, can you combine the hours from both activities towards the 750 hours criteria? 3. In your experience, how detailed does the contemporaneous time logging need to be for a real estate broker.

[@tax-modern]

1. As long as you have credible evidence (such as logs) of the time you spent, it doesn't necessarily matter. But if you're using the 100 hours test, no one else can spend more time on it than you, so you may be asked for information about how much time the property manager spent on it. 2. Yes, but only if they are not short term rentals (time spent on short-term rentals with an average stay of 7 days or less don't count). 3. There aren't specific requirements, but it's a good idea to show the date, start/end time, and a note about what type of activity it was.

[@empowered36]

Are there any special rules when you sell realestate that has unused losses, both passive & non- passive?

[@tax-modern]

The suspended passive losses get unlocked when you sell the property (unless you used a grouping election, which is uncommon). And that may partially or fully offset the capital gains, and if there is still more in suspended losses beyond that, then the losses can offset your other income (W-2, etc.).

[@empowered36]

What happens when you can't qualify as a REP 1 year due to COVID but then qualify the next? Do rental activities become passive for the year you can't qualify and then can they go back to non-passive the following year when you qualify?

[@tax-modern]

Yes. You may qualify some years and not others.

[@graceyang1612]

I currently own 4 rental properties, one of which is a multi-family with 3 units. These properties are 4 hours away from my primary residence, and rented as seasonal leases where the average tenancy is about 3 months long. I do not use an outside property manager, and I handle all the day-to-day operations of leasing and maintaining my properties. I don’t have any other employment and am married to a high W-2 earner. In 2020, I calculated about 1100 hours of time spent on managing which included overseeing repairs, remodeling, screening and signing tenants, managing housecleaning, including sometimes doing the cleaning myself. My question is regarding the comments you make at the end of this video stating that travel time to manage property, bookkeeping (paying bills, collecting rent, organizing tax records) and time spent purchasing properties do NOT count towards my REPS hours. This seems contrary to everything else I’ve read and heard. Can you clarify this statement? If I own these properties 100% and am not using outside property management, why would these activities not be considered ‘material participation’? I’ve looked online, and I can’t find any citation that says these are not permitted towards my hours. Can you cite the source?

[@TheRealEstateCPA]

Hi Grace - our tax guide to REPS has all of the citations you are looking for: www.therealestatecpa.com/guide-to-qualifying-as-a-real-estate-professional There are three buckets of hours that do not count: 1. Investor level time (includes paying bills, reviewing financials, bookkeeping, preparing taxes, etc) does not count UNLESS you are involved in the day-to-day management (which it sounds like you are)... Citations: Temp. Regs. Sec. 1.469-5T(f)(2)(ii); W.A. Barniskis, 78 TC Memo 226; Padilla v. Commissioner, TC Summ Opinion 2015-38; Jafarpour v. Commissioner, TC Memo 2012-165. 2. Education & Research time... check the guide I pasted above for a discussion. 3. Travel time (services must be "integral" to the operations of the rental and, often, travel time is not "integral" to operations)... Citations: Thomas E Truskowsky, TC Summ Opinion 2003-130; Lucero v. Commissioner, TC Memo 2020-136; IRS Audit Technique Guide, pg. 4-9... however, in Leyh v. Commissioner, TC Summ 2015-27 the Court allowed travel time (but Leyh's properties were local and travel was almost daily).

[@graceyang1612]

I had another question regarding 1099 filings. I paid my housekeeping around $2000 in 2020 for multiple cleanings of rental properties throughout the year. No one in the region 1099’s their house cleaners, and it’s extremely difficult to find good housekeeping. Is this something that would jeopardize my REPS status, if I don’t 1099 her?

[@TheRealEstateCPA]

I don't think so, but you may owe penalties for not issuing a 1099.

[@ljcdentist]

I work part-time. I have 44 properties. Out of these I manage about 10 of them. I also have a mini storage facility that I manage. Now since I manage some of these properties can I qualify as a real estate professional? Does Mini Storage count? My lease rent time for my mini storage is 1 months so no short term rental with them. My concern is the properties that the management company manages. Can I add any hours I also do dealing with these properties? Or since I don't put more hours in than they do on these properties may I used all properties that I participate in or only the ones I manage? Can I count the mini storage hours I work? Can I combine the mini storage with the properties I manage to reach this 750 hours?

[@sandraobrien8524]

what is material participation -can i have list or suggestions

[@TheRealEstateCPA]

There are 7 tests. Here is a list: www.law.cornell.edu/cfr/text/26/1.469-5T Look at numbers 1-7 in paragraph (a).

[@stephenbuttars9220]

My wife works for a real estate agent part time and works 250 hours a year paid with a 1099. we also own rental properties that we remodeled ourselves. She has well over 300 hours this year helping remodeling one of our rentals. Does she qualify for REP status?

[@TheRealEstateCPA]

To qualify as a REP, she needs to spend a total of 750 hours in real property busineses. A real estate agent is involved in a "brokerage" real property business as long as she's putting together buyers and sellers of property (compared to just buying the rentals that you collectively own).

[@rhahnda]

King

[@ms8172]

Wouldn't all of my reciepts from Lowe's & Home Depot count as my time logs?

[@LauraMontoya-h4m]

Investor activities count if you're involved in day to day management, and you have to be day to day management to qualify at all. Investor-type activities do not count unless the taxpayer is directly involved in day-to-day management or operations. The Reg. § 1.469-5T(f)(2)(ii)(B) provides that the following types of activities do not count unless the taxpayer is directly involved on a day-to-day basis in management or operations: • Studying or reviewing financial statements or reports. • Preparing or compiling summaries or analyses for the individual’s own use. 4-8 • Monitoring finances or operations in a non-managerial capacity. The above list is not all inclusive. Other activities could be investor-type activities such as organizing records, preparing taxes, and paying bills[7].

[@LauraMontoya-h4m]

In what regularly worked business in the real world is bookkeeping, paying bills or taxes, or R&D NOT considered work? Just fun and for your own personal fortification?

[@TheRealEstateCPA]

@@LauraMontoya-h4m@user-nc4wp8ql8w We hear you. However, regulations appear to state that they don't count as material participation.

[@sandramcewan4652]

So are you saying that the extra 250 hours can be for education/research/preparing taxes, paying bills, organzing records, compiling finance reports?

[@veronicagonzales4781]

So eff this status! 😂😂😂😂