What are the Rules for Qualifying as a Real Estate Professional?
The rules for qualifying as a Qualified Real Estate Professional (QREP) are set out in the Internal Revenue Code, specifically in Section 469(c)(7)(B) and (C), as well as in Treasury Regulations Section 1.469-9.
To qualify as a QREP, an individual must meet the following requirements:
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More than 50% of their personal services must be performed in real property trades or businesses in which they materially participate.
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They must perform more than 750 hours of services in real property trades or businesses in which they materially participate.
To meet the first requirement, an individual must show that they spend more time in real estate trades or businesses than in any other profession or occupation during the year. To meet the second requirement, the individual must maintain contemporaneous records that show the services they performed, the hours of those services, and the dates they were performed.
The regulations also provide guidance on what activities qualify as real property trades or businesses, which include development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage of real property. The regulations further state that an individual must materially participate in the real property trades or businesses in order to qualify as a QREP. Material participation is defined as involvement in the operations of the business on a regular, continuous, and substantial basis.
Additionally, the regulations provide that an individual cannot be a QREP if they are classified as a real estate dealer, meaning they are engaged in the business of selling real estate to customers with a view to earning a profit. The regulations also limit the amount of losses that can be claimed by a QREP based on their adjusted gross income and the amount of their investment in the real property activity.
It's important to note that the QREP rules can be complex, and the IRS has issued numerous rulings and court cases that have clarified or further complicated the requirements. A deep dive into Publication 925 will fill in all the gaps but you may need your tax preparer to explain things. Therefore, it is recommended that individuals consult with a tax professional who is knowledgeable about the QREP rules to ensure they are meeting the requirements correctly.