IRS Audit Questions For Real Estate Professional Status

By Jason Watson, CPA
Posted Sunday, May 25, 2025

Here is a list of questions and tests the IRS will blast through if your real estate professional status is challenged. We gleaned several items and took some liberties for emphasis and readability from the IRS Passive Activity Loss Audit Techniques Guide–

• Describe the work you perform as a real estate professional. Check occupations by signatures and W-2s.

• Who is the real estate professional, you or your spouse?

• Does the spouse claiming to be the real estate professional work full-time or part-time? How many hours specifically? Are they corroborated with pay stubs?

• Approximately how many hours did you spend working on your rentals in the year under exam? Ask the taxpayer for supporting documentation (appointment books, diaries, calendars, logs, etc.) You may want to give the taxpayer a time log to be completed for each rental – and for each year under exam. Material participation is a year-by-year determination. Rental property activities are generally not time intensive (so says the IRS).

• If the non-working spouse claims to be the real estate professional, ask what other commitments they might have. Is the spouse a student? Is the spouse providing full-time care to young children? Do you see them at soccer practice?

• Who monitors the rental properties? Who collects the rent? Who does the repairs? Who pays the bills and balances the checkbook?

• Do you have a real estate agent or property manager or employee responsible for any of the rentals? Ask for each rental property. Check Schedule E for large commissions or management fees. Also check for large labor expense since a hired contractor might have spent more time than taxpayer (see material participation test #3). If there is paid property management, it is a strong indicator taxpayer did not materially participate.

• Is anyone besides you involved with managing or overseeing any the properties? Does a relative or friend manage/monitor the property for free?

• Does a tenant receive free/reduced rent for managing the rentals – or for caring for the properties?

Indicators that the taxpayer did not materially participate:

• The taxpayer’s residence is hundreds of miles from the rental property. Are there personal reasons for the taxpayer to visit the rental property such as family or friends close by. Did the taxpayer ever live in the rental property and establish relationships nearby?

• The taxpayer has numerous other investments, rentals, business activities, or hobbies that absorb significant amounts of time.

• The taxpayer is elderly or has health issues.

• The majority of the hours claimed are for work that does not materially impact the rental property.

• Rental property operations would continue uninterrupted if the taxpayer did not perform the services claimed.

• 100 hours and more than anyone else: The taxpayer must not only prove they worked more than 100 hours, but more than anyone else. They must be ready to provide evidence of the participation of others. Additionally, there is no provision in IRC Section 469 to divide employee time by each unit.

• Substantially all: It will be very difficult for the taxpayer to meet this test for any condo-type activity that either has a management firm or is located away from the taxpayer’s residence with someone who manages the activity.

• Facts and circumstances: This test cannot be used if anyone besides the taxpayer is paid to manage the activity. An on-site management agency disqualifies the taxpayer from using this test.

• Request a copy of any management or commission agreement. Frequently, there is little left for the taxpayer to do.

• Significant time claimed for reading reports, paying bills or other investor-type hours, which are generally disregarded in the material participation tests.

The notes from the ATG are extremely helpful since it allows the rental property owner seeking real estate professional status to narrow down what the IRS is looking for. Knowing someone else’s argument or perspective ahead of time is essential for audit success.