Raleigh and Wake Forest Real Estate Professionals Beware - The IRS will be watching you closely
Are you a real estate professional? If you have a w-2 job elsewhere the IRS does’nt think so. The difference in income (and loss) classifications between passive losses and material participating losses can be large for the bottom line.
It looks like the IRS has set their sites on these investors. According to Diane Kennedy’s article at the Realty Times, audits on real estate professionals are rising as the IRS is enforcing this distinction.
To meet the IRS requirements, you need two things: spend the majority of your working time spent performing qualified real estate activities (regardless of what you do), and rack up at least 750 hours. Qualified activities include “develop, redevelop, construct, reconstruct, acquire, convert, rent, operate, manage, lease or sell” real estate.
Practically speaking you won’t make the cut if you work elsewhere and report full-time W-2 income. And there’s a third hurdle: material . In a twist that can only make sense in the IRS world, real estate activities are one of two things: passive, or materially participating passive. If you have a passive loss, it can only be used against passive Period.