IRS real estate professional status?

[vegasrealtor]

I know that to be a "real estate professional" one must have 750 hours and a majority of their work hours involved in real estate.

My question is;

If Jane works 1000 hours at Taco Bell, 500 hours managing her rentals and another 600 hours showing homes and researching land as a licensed Realtor does the 500 and 600 combine to make her a "real estate professional" or do all the required 750 hours have to be spent managing her rental property?

Also, what if Jane does some of her real estate research work at the Taco Bell during the slow times. Can she double dip if she keeps a log of her time?

Thank You,

Vegas Realtor

[mwcpa]

vegas.... your question is broad a lot more in the form of details is needed....and I am sure the owners of the Taco Bell franchise would not be happy to find their employee building her real estate empire on their dime... as an employer that employee would find themselves without a job...

caution...if her rentals are more than one, does she aggregate them together (pros and cons exist to doing such)

"RIA observation: In other words, if a real estate professional has multiple rental real estate interests, whether a particular interest is a passive activity or not is determined separately for each interest, unless the taxpayer elects to treat all rental real estate interests as a single interest. To the extent such interests are passive activities, the passive activity rules apply to each interest as a separate activity (or, if the aggregation election is made, to the aggregated activity as a whole). "

[vegasrealtor]

It is her dads restaurant.

She owns 7 single family homes as rentals. She is averaging about 65 % occupancy and has a lot of losses.

What are the pros and cons of being a real estate professional and does she qualify?

She is hoping to keep them all long term for retirement income.

[mwcpa]

vegas.. not enough facts are presented.... maybe you need to find a local and qualified tax professional in vegas who can review all of the facts.... the decision as to if one is or is not a real estate professional is based on facts and circumstances.

in the meantime... try the following material

www.irs.gov/businesses/small/industries/article/0,,id=185194,00.html (Real Estate Tax Center)

www.irs.gov/businesses/small/industries/article/0,,id=98881,00.html (Passive Activity Losses - Real Estate Tax Tips)

www.irs.gov/businesses/small/article/0,,id=146318,00.html (Passive Activity Loss Audit Technique Guide)

[rangerj]

Note that the income of a "real estate professional" is all ordinary and not passive. That means that losses are deductable without the passive loss limitations. It also means that a sale of an item of "stock in trade", that is a rental unit or piece of land, produces ordinary income also, and NOT capital gains.

[vegasrealtor]

What is the procedure for a sale of a rental home that someone has owned for ten years and two of those ten years the seller qualified as a real estate professional and 8 years they did not.

With an example of of $10,000 in profit would the profit be taxed as 80% capitol gains and 20% ordinary income or would it be determined by the status of are you a "real estate professional" in the year of sale?

[mwcpa]

"With an example of of $10,000 in profit would the profit be taxed as 80% capitol gains and 20% ordinary income or would it be determined by the status of are you a "real estate professional" in the year of sale?"

not quite....
the full disposition of business assets is generally "capital" in nature, certain items like receivables (for a cash basis taxpayer) or inventory are not.

In this case, if the former passive activity noted above was sold, the entire 10,000 gain would be capital (watch for depreciation "recapture" which would be subject to a maximum 25% tax).

The passive losses that could not be used for the 8 years would carry forward and not be allowable until the asset was disposed of in full...

[vegasrealtor]

MWCPA I thank you for the informative links above.

I still have one question after reading as much as I can absorb.

This question has nothing to do with the material participation area but is only focused on the half of her time rule for a real estate professional.

I see that time doing service as an employee in a real estate field does not count toward the 50% rule for a "real estate professional" unless you own 5% or more of the business.

But what about in this example where Jane works as an employee at her dads taco bell and during her lengthy break periods she performs work on her brokerage duties researching homes and listing homes on the MLS.

Since she is not performing her brokerage duties for the W-2 employer and it has nothing to do with her W-2 employment except that her W-2 employment time card pay is from noon to midnight that day and she performs her brokerage duties from 3pm to 6pm causing an overlap of her time card as she is paid to hang around by her father.

Can the time from 3pm to 6pm be qualified as time spent as a real estate professional?

In other words she has spent twelve hours that day as an employee in non-real estate activities and 3 hours as qualified time toward the 50% rule. Plus 2 hours she spent from 8am to 10 am on the same day giving her a total of 5 R/E pro hours and 12 non qualified hours?

Would this be correct or will the IRS examiner throw out any overlapped time that may benefit her?

[rangerj]

Given the family relationship the time paid for by her father spent doing real estate research, or other real estate matters while on her father's payroll, should be a nondeductible gift from her father, and not deductible compensation. If she submitted a time card, or otherwise indicated that she worked for the compensation at daddy's store, then one has to wonder about her veracity relative to the real estate time spent.

[taxref]

In the event of an audit, she may very well have a tough sell. That's not to say its impossible to win, but if I were an auditor being on the clock on a job while also doing real estate work would not seem plausible. You might have a chance with extremely good documentation, but its not a position I'd feel confident over.

[mwcpa]

i concur with ref and ranger, based on the facts presented... the position that vegas's friend is a real estate professional is very weak at best...