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Pitfalls With Real Estate Professional Status

PostedMay 27, 2025

cost segregationBy Jason Watson, CPA
Posted Sunday, May 25, 2025

Here are some pitfalls with real estate professional status-

  • Having a management company generally kills off #2 and #3 of the material participation tests, leaving #1 which is the 500 hours threshold. 10 hours a week. Every week. That’s a whole day and then some.
  • Having a W-2 job is not an instant killer. However, it becomes an audit risk. You will either need to prove that you spend more hours on real estate activities than your part-time W-2 gig or that you are a 5% or greater owner in a company that qualifies as a real estate trade or business.
  • Poor documentation and crappy corroboration. Or crappy documentation and poor corroboration. You might be considered to have disguised disorganization. The possibilities are endless.

Here is a summary of how W-2 jobs can be problematic or useful-

Situation Outcome
You and spouse have full-time W-2s Mostly hosed
You have a full-time W-2, spouse has a part-time W-2 Getting better, still have audit risk although part-time W-2 might be small in terms of hours
You have a W-2, spouse does not Spouse should pursue REPS, your time counts towards material participation
You own at least 5% in a real estate company, regardless of receiving a W-2 This time counts for you, and the 750 hours should be a snap

Jason Watson, CPA, is a partner and the CEO of WCG CPAs & Advisors, a boutique yet progressive tax, accounting and rental property consultation firm with over 80 team members headquartered in Colorado serving real estate investors worldwide.

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