Phoenix CPA

Glendale Tax Prep | Real Estate Pro?

Generally speaking, rental real estate is a passive activity to a tax payer even if they materially participate in the rental process. However, if the tax payer is a real estate professional, this income is no longer treated as passive as long as they also materially participate. So what does it take to qualify as a real estate professional?

You are treated as a real estate professional if both of the following apply to your situation:

  1. More than 50% of the personal services performed by the taxpayer in all trades or business during the year are performed in real property trades or businesses in which the taxpayer materially participates.
  2. The taxpayer performs more than 750 hours of services during the year in real property trades or business in which the taxpayer materially participates.

The term real property trades or businesses  applies to any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing or brokerage trade or business. Each interest the taxpayer has in a rental real estate is treated as a separate activity for determining whether the taxpayer materially participates unless the taxpayer makes a “grouping election” to have all of the rental real estate treated as a single activity.

For example, you are an active real estate agent who also owns 2 rental properties. You meet the qualifications to be considered a real estate professional but you only materially participate in one of the rental properties. The rental property you materially participate would be treated as non-passive whereas the one you do not materially participate would be considered passive. If you made the election to have the 2 rental properties treated as 1 (grouping election), then both properties would be non-passive.

If you have any questions or would like to discuss this further, do not hesitate to contact us at Dusseau & Makris, PC, your CPA firm for Glendale Tax Prep.