For individuals engaged in real estate activities, qualifying as a real estate professional for tax purposes offers significant advantages, such as offsetting passive losses against non-passive income to reduce overall tax liability. However, achieving this designation requires meeting specific IRS criteria and maintaining accurate records.
Minimum Hour Requirements
To qualify as a real estate professional, the IRS requires individuals to spend more than 750 hours during the tax year in real property trades or businesses in which they materially participate, and more than half of all personal services performed during the year must be in those real property trades or businesses. Real property trades or businesses include development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage. For joint filers, one spouse must meet both tests independently. 1Legal Information Institute. 26 U.S. Code § 469 Passive Activity Losses and Credits Limited
Material Participation Criteria
Meeting material participation criteria is another key requirement. The IRS provides seven tests, and satisfying any one of them is sufficient—for example, participating more than 500 hours, substantially all participation, at least 100 hours and not less than any other individual, or aggregating more than 500 hours across “significant participation activities” (each at least 100 hours). A spouse’s participation counts toward material participation, and you may substantiate participation by any reasonable means; contemporaneous daily logs are not strictly required if other credible records show the hours. 2Legal Information Institute. 26 CFR § 1.469-5T Material Participation (Temporary)
Documenting and Logging Work
Accurate documentation of work-related activities is crucial to meet IRS guidelines. Using time-tracking software or detailed spreadsheets can help record dates, hours worked, tasks performed, and associated real estate projects. For example, logging time spent on property management or client meetings provides evidence of active involvement. Supplementary documentation, such as emails, contracts, or meeting notes, strengthens these records. Regularly reviewing and updating logs ensures accuracy and reflects changes in activities over the year.
Aggregation Choices
Taxpayers may elect to treat all rental real estate interests as a single activity. This can simplify meeting material participation by combining participation across properties, but the election is made by filing a statement with the original return for the year and is binding for future years unless revoked due to a material change in facts and circumstances. 3Legal Information Institute. 26 CFR § 1.469-9 Rules for Certain Rental Real Estate Activities
Classification and Reporting
Proper classification and reporting on tax returns are essential. If you qualify as a real estate professional and materially participate in the rental real estate activity, that rental activity is treated as non-passive; report it on Schedule E accordingly and generally do not include it on Form 8582, which applies to passive activities. 4Internal Revenue Service. Instructions for Form 8582
Ineligible Circumstances
Certain conditions can disqualify individuals from real estate professional status. Employment in a non-real-estate occupation consuming most of a taxpayer’s working hours is a common disqualifier. For example, a full-time physician managing rental properties part-time is unlikely to meet the required hours and “more-than-half” tests. Properties held in entities where the taxpayer does not materially participate, or reliance on third-party services such as property managers without sufficient oversight and involvement, may fail to demonstrate the necessary active engagement. Passive activities, such as holding shares in a real estate investment trust (REIT) or owning properties primarily for appreciation, do not meet the criteria. Taxpayers should carefully assess their involvement in real estate to determine eligibility.