10.3 Real Estate Professionals
Real estate rental activities are automatically passive (10.1) for all taxpayers except qualifying real estate professionals. You qualify as a real estate professional if you meet both parts of Test 1 below. If you qualify, any rental real estate activity in which you materially participate (Test 2) is not a passive activity. Income or loss from the rental real estate is reported as nonpassive on Schedule E (Form 1040).
Test 1: Qualifying as a real estate professional.
You must meet both of the following two activity tests for the tax year:
1. More than 50% of your personal services in all of your businesses must be performed in real property businesses in which you materially participate (10.6). For this purpose, a real property business means any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental operation, management, leasing, or brokerage trade or business. Real estate financing is not included. Personal services performed as an employee are not treated as performed in a real estate business unless you are considered a “more than 5% owner” in the employer. That is, you must own more than 5% of the outstanding stock or more than 5% of total combined voting powers of all stock issued by the corporation. In a noncorporate employer such as a partnership, you must own more than a 5% capital or profit interest.
2. More than 750 hours of your services are in real property businesses in which you ...