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Real Estate Professional Status: How Many Units Do I Need to Qualify?

Summary: One of the most common questions we get about qualifying for Real Estate Professional Status is: How many rental units do I need to qualify? In this article, we dive into this question and more!

 

[Disclaimer: We are not accountants, lawyers or financial advisors, so please consult your own team of professionals about the topics covered in this article.]

 

If you invest in real estate, you know that losses from rentals are by definition passive losses and cannot be used to offset W2 or 1099 income. Real Estate Professional Status is a little known tax election that allows you to make these losses non-passive. You can read more about qualifying for Real Estate Professional Status here

One of the most common questions we get about Real Estate Professional Status is, How many rental units do I need to qualify?

Before diving into the answer, let’s back up and do a brief recap on the two criteria you need to meet in order to qualify for Real Estate Professional Status (REPS):

  1. Real estate has to be your primary profession.
  2. You need to spend a minimum of 750 hours a year on real estate and you need to materially participate.

Let’s take a look at the first criteria.

 

Real Estate Has to be Your Primary Profession

It’s easiest to think about this criterion from the perspective of your current profession. 

If you are currently a stay-at-home parent, real estate can easily become your primary profession. If you are employed, you have to spend more time doing real estate than the time you spend on your job.

One question we often get is whether or not you can qualify for REPS if you invest in syndications or REITS (real estate investment trusts), and the answer is clearly “no.” These investments are considered passive activities. So none of the hours you spend evaluating these investments will help you qualify for REPS.

Now let’s look at the second criteria.

 

You Need to Spend a Minimum of 750 Hours a Year on Real Estate

The requirement regarding hours depends on the amount of time you spend on your other job (the one you went to college and grad school for).

If you don’t have a job, then 750 hours (the minimum) will suffice. If you have a job where you work 1000 hours, you need to spend more than 1000 hours on real estate.

In addition to the 750 hours, there is something called material participation. There are a number of material participation tests and they are based on hours. In order to materially participate, you have to own rentals and you need to very involved in the management and spend the requisite hours.

For me, real estate is my primary profession. I know everything that’s going on with each of our properties. I oversee every aspect of the property from leasing, operations, overseeing construction projects, etc. It also helps to have more units because we elect to group our real estate activities, so the more rentals we own, the easier it is to qualify for material participation.

So this is where the primary question of this article arises. How many rental units do you need to qualify? 

 

How Many Units Do You Need to Qualify for REPS?

The answer is, it depends. (Sorry.) 

It depends because rental units aren’t the only thing that matters (Note: we are using “units” and “doors” interchangeably). You also have to look at what we call “intensity of management.”

In some cases, the level of management can be so intense that you can get to 500 hours with only a small number of rental units.

This is best illustrated with a chart.

If you have a lot of rental units and high intensity of management, the likelihood of qualifying for REPS is greater.

If you have a small number of rental units and low intensity of management, the likelihood is low.

The remaining areas are what we call Grey Zones. When you are in the Grey Zone, whether or not you qualify is unclear. You risk having your status getting disqualified if you are ever audited.

So what should you do if you are in the Grey Zone?

We recommend you don’t stay in this Grey Zone very long. You simply need to increase your real estate activity in terms of intensity or buy more rental units.

You can see that the goal shouldn’t be to acquire the minimum number of units needed to qualify.

The reason is, goals are powerful and whatever goal you set, you’ll likely achieve it. If you set a low bar, you’ll reach it. If you set a high bar, you’ll also reach it.

Therefore, you might as well pick a goal that will put you well outside the grey zone and accelerate your journey to financial freedom at the same time!

Do you want to learn how to creatively fund your real estate portfolio and achieve financial freedom? Join the conversation! Follow our Semi-Retired MD  Facebook page and join our Doctors or Professionals  group!

Semi-Retired M.D. and its owners, presenters, and employees are not in the business of providing personal, financial, tax, legal or investment advice and specifically disclaims any liability, loss or risk, which is incurred as a consequence, either directly or indirectly, by the use of any of the information contained in this blog. Semi-Retired M.D., its website, this blog and any online tools, if any, do NOT provide ANY legal, accounting, securities, investment, tax or other professional services advice and are not intended to be a substitute for meeting with professional advisors. If legal advice or other expert assistance is required, the services of competent, licensed and certified professionals should be sought. In addition, Semi-Retired M.D. does not endorse ANY specific investments, investment strategies, advisors, or financial service firms.

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Hi, we’re Kenji and Leti

we provide coaching and mentorship for doctors and high-income earners

Several years ago, we were newlyweds working as full-time hospitalists. On paper, it looked like we had everything: the prestigious careers, the happy marriage, the luxurious rental home, the cars, etc.

But in reality? Despite having worked for several years, we had very little savings. Despite our high income, we had very little freedom in terms of time or money.

One thing was clear: we had to do something.

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