REPS 04: How the IRS Audits the Real Estate Professional Status & What to Do to Protect Yourself

By default, rental losses are passive. They can only offset other passive income. Qualifying as a real estate professional allows you to take rental losses against W2 or active business income.

This episode is about IRS Audits of REPS. What is their perspective and lens they're looking through? What are they looking to see? How do you protect yourself?

If you haven't already listened to REPS 03, check it out first. This is the final episode in this series.
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Let's connect:

[OhioTreasures]

So I should just buy a go pro and wear it for any activity with the rental and have hours of video proof. Seems like alot but in our situation, I own the home next door and work part time 1099 my husband works full time 10 months a year in construction. We can do everything involved from a roof to landscaping ourselves.

[maxicanamerican]

Where could we get a good time log for the
“ Real Estate Pro “ ???

[sandramcewan]

@Brandon Hall you mentioned multiple times. that education and research doesn't count towards hours. Are you referring to 750 hour or 500 materially participation hours? Thank you!

[mtigress]

I really appreciate how you are being realistic about REP vs other channels pushing the status and borderline being promoters. It's sad when the taxpayers have to pay penalties for shady advice.

[sherrysmith]

If I had a long-term rental for the first 5 months of the year and then I converted that rental to short term rental (less than 7 days) effective June 1, does the "hours test" towards the Real Estate Professional start 1/1/2023 or would it start when I started my short term rental? Meaning will I have to prove I was a real estate professional the whole year?

[virciviliumrerumperitus]

What about aggregated properties located in different states? Can the loss in one state impact the “income” on a property in another state per state income taxes?

[nicolejenkins]

I am taking the courses to get my real estate license currently. So the time I’m taking to take those courses does NOT count toward the hours?

[Jesvalles]

So.... What does count for material participation if not book keeping, accounting, etc ... Do I have to literally swing a hammer every time?

[veronicagonzales]

Is this the same thing as qbi safe harbor?

[hdcs-higherriskdepositcomp]

Very helpful, thanks. A few questions:
1. When a landlord does the property management themselves, is the 100 hrs of material participation in an individual property generally viewed as more credible?
2. When the RE professional has rentals and is an active real estate broker, can you combine the hours from both activities towards the 750 hours criteria?
3. In your experience, how detailed does the contemporaneous time logging need to be for a real estate broker.

[raz]

How can a real rate professional qualify to use limited partner losses in a syndication for other properties and other income sources?

[graceyang]

I currently own 4 rental properties, one of which is a multi-family with 3 units. These properties are 4 hours away from my primary residence, and rented as seasonal leases where the average tenancy is about 3 months long. I do not use an outside property manager, and I handle all the day-to-day operations of leasing and maintaining my properties. I don’t have any other employment and am married to a high W-2 earner. In 2020, I calculated about 1100 hours of time spent on managing which included overseeing repairs, remodeling, screening and signing tenants, managing housecleaning, including sometimes doing the cleaning myself. My question is regarding the comments you make at the end of this video stating that travel time to manage property, bookkeeping (paying bills, collecting rent, organizing tax records) and time spent purchasing properties do NOT count towards my REPS hours. This seems contrary to everything else I’ve read and heard. Can you clarify this statement? If I own these properties 100% and am not using outside property management, why would these activities not be considered ‘material participation’? I’ve looked online, and I can’t find any citation that says these are not permitted towards my hours. Can you cite the source?

[BethWardecki]

I have so many questions... is there someone i can chat with? or email with?

[JakeRandolphMarketing]

Does the 100 hour test not apply with a property manager even if its a short term rental?

[empowered]

Are there any special rules when you sell realestate that has unused losses, both passive & non- passive?

[tinariley]

Why does research looking for a property not count when one of the businesses in the IRS tax code is Acqusition? You have to look on zillow and view properties to buy them. If you buy 4 in a year you look at 100s of properties to close on 4 which all takes time ....

[ljcdentist]

I work part-time. I have 44 properties. Out of these I manage about 10 of them. I also have a mini storage facility that I manage. Now since I manage some of these properties can I qualify as a real estate professional? Does Mini Storage count? My lease rent time for my mini storage is 1 months so no short term rental with them. My concern is the properties that the management company manages. Can I add any hours I also do dealing with these properties? Or since I don't put more hours in than they do on these properties may I used all properties that I participate in or only the ones I manage? Can I count the mini storage hours I work? Can I combine the mini storage with the properties I manage to reach this 750 hours?

[alliesteam]

To clarify so if person has more than 5 percent of a real estate company which does variety of real estate activities including property management, and the person is an officer of the real estate company then what?,

[graceyang]

I had another question regarding 1099 filings. I paid my housekeeping around $2000 in 2020 for multiple cleanings of rental properties throughout the year. No one in the region 1099’s their house cleaners, and it’s extremely difficult to find good housekeeping. Is this something that would jeopardize my REPS status, if I don’t 1099 her?

[empowered]

What happens when you can't qualify as a REP 1 year due to COVID but then qualify the next? Do rental activities become passive for the year you can't qualify and then can they go back to non-passive the following year when you qualify?