A real estate professional is a person who actively engages in business directly related to real estate in one or more of, many parts of the real estate life cycle, such as real estate financing, real estate investing, sales and building of property.
Employees of real estate companies may not be considered real estate professionals by the Internal Revenue Service if they do not receive income outside of salary, are not real estate business owners, and do not receive taxable rental and real estate related income in accordance with the provisions of the IRS 'real estate professional tests'.
How a person is defined according to the United States Internal Revenue Service (IRS) may be different from other economic, political and/or business definitions in regard to the practice of real estate business.
The IRS status of 'real estate professional' can have implications on how a person is taxed. What's more the means by which a professional engages in the practice of real estate also has an impact on taxation. That is to say, whether one is a real estate professional as an employee, business owner, partner or shareholder all have different tax implications.
The IRS Real Estate Professional Test(s)
The Internal Revenue Service uses two tests to determine whether an individual is a real estate professional. Those tests are the 'T/B test' and the 750 hour test. In the T/B test more than half a persons business activities should be in real estate as per the I.R.S.'s definition of real estate activity.
In the second test, the professional must spend at least 750 hours per tax year engaging in real estate business. These tests can be found directly at the IRS website, http://www.irs.gov.
IRS Tax Implications for Real Estate Professionals:
• Using an accrual method of accounting may be beneficial in reporting expenses that aren't paid by the end of a tax year. However, in this method income that has not be received is also reported. If the proportion of expenses to income, are greater using the accrual method, it may yield lower taxes than using a cash accounting system.
• If tax filing as a sole-proprietorship, earnings from real estate business will be taxed according to provisions for self employment which include self employment tax and potential deductions such as office expenses and some overheard costs.
• An IRS form 1040 Schedule E (Supplemental Income and Loss) may be used when filing tax information for a given tax year. This form may benefit individuals who rent properties and includes income such as income from rental real estate and expenses related to advertising, repairs and fees.
• Financial Insolvency excludes taxation of gain on sales of property within a partnership business. Such is the case to the extent that such tax benefits do not re-afford a real estate professional solvency. In other words, if the tax free sales allow a business partner to retain income above and beyond net loss, that gain will be taxed proportionally.
• Consultation with a taxation specialists and the Internal Revenue Service may clarify questions of uncertainty and confusion and might be advisable in a complicated tax situation.
Real Estate Professionals according to the Internal Revenue Service are not necessarily the same as real estate professionals as defined by the business community, and the real estate professional themselves. United States tax code often has its own way of defining individuals for tax purposes that may not apply in other legal and professional situations and/or contexts. How a professional is defined by the Internal Revenue Service is generally the definition, and related rules and regulations by which one should consider income, and taxation matters.
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