One thing ive heard alot from folks lately about is how they are having their spouse qualify as real estate professional status, and getting the hours for it via having them “manage the property manager” and review financial statements (known as investor hours).
Im sadly here to tell you that under audit, and we have 100s of court cases to back this up, that this WILL NOT FLY. You need to be materially participating in those hours for them to count.
But lets back up a minute, let me cover some basics for folks who don’t do this all day like me.
REPS = real estate professional status. This is an important status for people to go for since it allows you to write off losses from rental activities on your other active income.
Funny enough, prior to 1986 this rule didn’t exist, and you could write off losses from rentals on w2 income. Must have been nice 😛
To qualify for the status there are two tests:
1. spend 750 hours in a real property trade or business, AND spend more then half your working time in it. Sorry w2’ers, there is only one successful court case I have found where the guy sued and won.
2. pass 1 on 7 material participation tests. There are only really 3 relevant ones:
1. do more work in the property then anyone. (including contractors, cleaners, etc)
2. do 100 hours of material participation and that time is more then anyone else. (including contractors, cleaners, etc)
3. 500 hours of material participation
What is material participation?
These are activities where if they are not done, the negatively effect the p&l. Said differently, these activities are integral to the operation of your business.
So next time your CPA saids you can use education hours, looking at financial statements(investor hours), or my favorite “managing the property manager” run for the hills. This will get you audited and you will lose.
There are ways around it though like everything else, just need to get creative 😉
