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It’s no secret that real estate professionals get a lot of deductions, but the IRS doesn’t let just anyone qualify and take the deductions.
You must meet the IRS guidelines to take the deductions. Fortunately, they aren’t hard to meet and if you meet these two requirements, you can take advantage of some pretty hefty tax deductions.
You Must Work the Business at Least 50% of your Time
The largest qualification to get the real estate professional deduction is to spend at least 50% of your time as a real estate professional. By 50% of your time, we mean 50% of your working time. You can’t work a regular job and work real estate on the side for a few hours a week and qualify.
You must work equal hours at each, or at least as many hours at real estate as you do your ‘regular job.’
You Must Materially Participate in Real Estate
Another requirement is that you must materially participate in the real estate business. For example, if you own a rental property and manage it, you materially participate. It can’t be a passive investment. It must be something you spend some or a lot of your time doing to get the deductions.
You Must Meet the 750-Hour Requirement
Besides spending at least 50% of your professional time working yoru real estate gig, you must work at least 750 hours in it. This isn’t hard to achieve if you are an active participant, but it’s a requirement nonetheless.
Keep in mind, you must be able to prove your hours, so keep careful track of every hour you work so you can prove you meet the requirement.
Pro tip: You must elect to treat all your rental properties as one entity if you want to work 750 hours combined on all properties. If you don’t, the 750-hour rule pertains to each property individually, meaning you must work 750 hours on each property to qualify for the deductions.
The key to qualifying for the real estate deductions is to keep careful records of the time you spend working it.
Log each hour you work, and at which property. Prove you are an active participant and that you work enough hours to meet both the 750-hour minimum time requirement plus the 50% of your professional time spent on the activities.