Are You a Real Estate Pro? A Comprehensive Tax Guide for 2025

Understanding tax rules can help real estate investors save money and avoid common pitfalls. The tax code has many details, but focusing on the right areas can make a big difference. Here are some key points to consider:

What Does It Mean to Be a ‘Real Estate Professional’?

The IRS has specific guidelines for qualifying as a real estate professional, which can impact how rental losses are handled. To meet the requirements, two conditions must be met:

1. More than half of personal work time must be spent in real estate-related activities. These include development, construction, acquisition, rental, operation, management, or brokerage of real property.
2. At least 750 hours must be spent on real estate activities during the tax year.

Important Note: Those who work full-time outside of real estate usually do not qualify. Work as an employee only counts if at least 5% of the employer’s business is owned.

More details can be found in the IRS Real Estate Tax Center.

What Is ‘Material Participation’?

Material participation means being actively involved in managing real estate activities. The IRS provides several ways to determine this, including:

• More Than 500 Hours: Working more than 500 hours on the activity in a year.
• Substantially All Participation: Being the main person involved in the activity.
• More Than 100 Hours and Primary Participation: Working at least 100 hours and contributing as much or more than anyone else.
• Significant Participation Activity: More than 100 hours per activity, with a total of over 500 hours across all activities.
• Prior Year Participation: Material participation for five of the last ten years.
• Personal Service Activity: Working in a personal service business for at least three prior years.
• Facts and Circumstances: Consistent, ongoing, and substantial involvement of at least 100 hours.

Understanding Passive Activity Loss Rules

Rental real estate is usually considered a “passive activity.” This means that losses from rental properties can only offset income from other passive activities. Any remaining losses must be carried forward to future years. However, those who qualify as real estate professionals can use losses to offset other income in the same year, which can lead to significant tax benefits.

More details can be found in the IRS Tax Tips for Real Estate.

Should Rental Properties Be Combined for Tax Purposes?

By default, each rental property is treated separately for tax purposes. However, an election can be made to treat all rental properties as a single activity. This must be done by filing a statement with the tax return. If this step is not taken, each property must meet material participation rules separately, which could limit the ability to deduct losses.

A Tax Court case has emphasized the importance of making this election. Without it, a taxpayer might not meet material participation requirements, leading to passive loss restrictions.

Key Steps for Real Estate Investors

• Keep detailed records of all time spent on real estate activities.
• Understand the difference between repairs and improvements, as this affects deductions.
• Determine whether real estate professional status is met.
• Evaluate material participation using IRS guidelines.
• Consider making an election to combine rental activities for tax purposes.
• Work with a tax professional for guidance. A real estate tax accountant can help ensure compliance and maximize deductions.

For those searching for a real estate CPA near me, finding a knowledgeable professional is important. A real estate accountant near me can provide expert advice and help investors make informed tax decisions. Understanding the right strategies can lead to better financial outcomes and fewer surprises at tax time.