Hello,


I am a landlord with 3 properties. We are taking a tax loss of between $6000-$10,000 a year on each property (due to repair/maintenance, mortgage interest, taxes, and depreciation). Our MAGI is over 150k, so we are unable to write any of that off against our active income.

Currently I am a teacher, but have my own contracting business in my spare/summer time. If I were to quit my job and take on contracting as my primary business -- would I be able to be classified a "real estate professional" if I worked over 750 hours a year as a contractor and had no other job? Thus being able to write off our rental losses against my contracting income? The definition by the IRS describes any profession involve in specifically "constructing or reconstructing" real estate.

We materially participate in our rentals and satisfy that requirement.

Thanks for the thoughts!

Sorry, but to be a real estate professional, you must either SELL real estate for a living or work in construction of some type. People who manage rental properties full-time STILL do not qualify as a real estate professional unless they are in one of these professions.

I know this because one of clients is a retired executive who owns ten rental properties and effectively is involved in the management of those properties full-time, yet he does NOT qualify as a real estate professional.

Let me clarify, my contracting business is involved in renovating outside of my own rental properties. As in, general contractor. Wouldn't that income be applicable assuming it involves more than half my time and over 750hrs?

Maybe.

If you were my client, I would ask for a formal decision in writing from the IRS as to whether they would accept your contracting business as a "real estate professional" before filing your return as one.

I guess I'm confused still then. In your example, your client is a full-time property manager, but only for his personally owned properties


If the IRS has the definition as stated below, wouldn't that cover any building trade?



Real property trades or businesses. A real property trade or business is a trade or business that does any of the following with real property.
Develops or redevelops it.

Constructs or reconstructs it.

Acquires it.

Converts it.

Rents or leases it.

Operates or manages it.

Brokers it.

You are NOT reconstructing; you are RENOVATING! The IRS may look at it as simply a company that improves the properties that already exist and thus NOT qualify.

I believe you can qualify as a real estate professional if you are a general contractor and meet the hour rules. But then you have to meet the material participation rules for the properties and this must be handle correctly. You may need to make the single activity election. You might want to review:

http://www.ustaxcourt.gov/InOpHistoric/miller6.TCM.WPD.pdf

You also may need to speak with a professional to be sure you get this handled correctly. The IRS has made a lot of money from people misunderstanding all the nuances related to real estate professionals and/or passive losses.

You are NOT reconstructing; you are RENOVATING! The IRS may look at it as simply a company that improves the properties that already exist and thus NOT qualify.

Converts it.

Rents or leases it.

Operates or manages it.


I am not disagreeing with you simply because you may think I don't like your answer -- but none of the three definitions I copied above involve NEW properties. They all would apply to properties that already exist.

In searching, I did find a court case mentioned here -- in Miller v. Commissioner, the man was a general contractor and did qualify as a REP. The problem was he did not materially participate for enough time in all properties

I believe you can qualify as a real estate professional if you are a general contractor and meet the hour rules. But then you have to meet the material participation rules for the properties and this must be handle correctly. You may need to make the single activity election. You might want to review:

http://www.ustaxcourt.gov/InOpHistoric/miller6.TCM.WPD.pdf

You also may need to speak with a professional to be sure you get this handled correctly. The IRS has made a lot of money from people misunderstanding all the nuances related to real estate professionals and/or passive losses.

Thanks, in searching I am finding that this is a large area for audit. I am just trying to decide if leaving my job to focus solely on my self-employed contracting business would save me money by allowing more of a write-off.

Like you said, a LARGE audit flag. That is why I would ask the IRS ruling before filing.

Like you said, a LARGE audit flag. That is why I would ask the IRS ruling before filing.

Wasn't aware I could do that -- how can I go about getting verification from them?

You have to formally request a ruling from the IRS. You should get professional help to do this.