Material participation: To qualify as a real estate professional, you must meet the IRS’s criteria for material participation. This generally means that you must be involved in the real estate trade or business on a regular, continuous, and substantial basis. The IRS has specific tests to determine material participation, including spending at least 750 hours per year in real estate activities and performing more than half of your total working hours in such activities.
Active participation: If you don’t meet the material participation requirements, you can still potentially qualify for certain deductions if you actively participate in rental real estate activities. Active participation involves having a significant role in management decisions, such as approving tenants, setting rental terms, or making repairs.
Deductible expenses:
Real estate professionals can deduct various business-related expenses, including advertising costs, property management fees, repairs and maintenance, insurance premiums, professional fees (e.g., legal and accounting services), travel expenses for business purposes, and mortgage interest. These deductions can help reduce taxable income and lower the overall tax liability.
Losses and passive activity rules: Real estate professionals may be able to offset losses from their real estate activities against other types of income, such as wages or investments. However, these losses are subject to the passive activity loss rules, which limit the deductibility of losses from passive activities (those in which you do not materially participate). It’s important to consult a tax professional to understand how these rules apply to your specific situation.
Duane graduated with a degree in business and a major in real estate from the University of Colorado in 1978. He has been a REALTOR® in Boulder since that time. He joined RE/MAX of Boulder in 1982 and has facilitated over 3,000 transactions over his career. Duane has been awarded Realtor® Emeritus by the National Association of REALTORS and the Circle of Legends by RE/MAX LLC. Duane is also the author of two books, REALTOR for Life and The Velocity of Wealth. You can reach out to Duane at BoulderPropertyNetwork.com or at DuaneDuggan@boulderco.com