Quick Preview of Qualifying as Real Estate Professional

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

Before we go too far down the time road, let’s quickly review the simplified basics of real estate professional status-

• You materially participate and provide personal service hours of 750 or more in real property trades or businesses.

• Over half of your time spent on all activities where you perform a personal service must be spent on real property trades or businesses (this includes W-2 jobs and small businesses). If you work 2,080 hours as a 9-5er W-2 suit, you will need to work 2,081 hours in real estate. Sure, no one wears suits anymore, but you get it.

If you meet these two, you are what the IRC refers to as a qualifying taxpayer, or what the industry calls a real estate professional. But you are not done! The final step is to demonstrate material participation as a real estate professional in each of your rental activities unless formally elected to group all activities as one (more on the 1.469-9(g) election in a bit).

You might sense a small circular reference, and while technically there isn’t one, the two-step process can be practically tricky. Ok, here we go-

Grouping Real Estate Activities for 750 Hours Test

There are two issues at play here, and it is important to understand the seemingly subtle differences. You can group all your real property trades or businesses together for the 750 hours material participation test. Please do not confuse this with the formal election to treat all your rental properties as a single activity to satisfy one of the seven material participation tests. These groupings are very much different.

The next two pages are a bit nutty, so please buckle up.

You could have multiple sources of qualified material participation hours from time spent on your rental properties directly, to time spent as a real estate broker, to time spent as a home remodeler. Specifically, you spend 98 hours on your sole rental property, 120 hours as a real estate broker and you also spend 550 hours remodeling homes. This is a total of 768 hours. With reference to our recently stated basics, you are now over the first of three hurdles to leverage the real estate professional status.

There is a gotcha, and it might be a big one with short-term rentals with an average guest stay of 7 days or less. Temporary Treasury Regulations 1.469-1T(e)(3) reads-

(3) Rental activity—(i) In general. Except as otherwise provided in this paragraph (e)(3), an activity is a rental activity for a taxable year if

(A) During such taxable year, tangible property held in connection with the activity is used by customers or held for use by customers; and

(B) The gross income attributable to the conduct of the activity during such taxable year represents… amounts paid or to be paid principally for the use of such tangible property.

(ii) Exceptions. For purposes of this paragraph (e)(3), an activity involving the use of tangible property is not a rental activity for a taxable year if for such taxable year-

(A) The average period of customer use for such property is seven days or less;

Read those last two sentences again. Are we telling you that a short-term rental with an average guest stay of 7 days or less is not considered a rental activity? Not even a real property trade or business? No, but the regulations are.

Oh, and so are the courts.

In Bailey v. Commissioner, Tax Court Memo. 2001-296, and again in Bailey v. Commissioner, Tax Court Summary Opinion 2011-22, which are different people with different facts but the same problem- the court used a literal interpretation of “the average period of customer use for such property is seven days or less” and stated that the activity was not a rental activity, and therefore those hours did not count as material participation.

The logic in both Tax Court cases is flawed since they relied upon the formal 1.469-9(g) election to group all rental activities into one activity for the primary purpose of demonstrating material participation. However, grouping activities for the 750 hours test does not rely on the formal election to group rental activities. We are getting a bit into the weeds.

The bad news is that your time spent on short-terms rentals with an average guest stay of 7 days or less does not count towards the 750 hours. The good news is that these short-term rentals are not considered passive activities and sidestep passive loss limitations. However, if you have a mixed bag of real estate investments, this flawed Tax Court logic could become problematic.

Sidebar: Keep this 7 days or less thing in mind. Also, keep in mind that rental properties are presumed to be passive. Therefore, the basis of the short-term rental loophole is that it is not a rental activity because of the 7 days or less average guest stay. More on that in a bit in our short-term rentals section.

If you cannot get enough, here is a contradicting blurb from Chief Counsel Advice 201427016–

whether a taxpayer is a qualifying taxpayer within the meaning of section 469(c)(7)(B) and Treas. Reg. § 1.469-9(b)(6) depends upon the rules for determining a taxpayer’s real property trades or businesses under Treas. Reg. § 1.469-9(d), and is not affected by an election under Treas. Reg. § 1.469-9(g). Instead, the election under Treas. Reg. § 1.469-9(g) is relevant only after the determination of whether the taxpayer is a qualifying taxpayer.

Let’s break this down. IRC Section 469(c)(7)(B) refers to the 750 hours requirement. The Treasury Regulations 1.469-9(g) refer to the formal election to group all your rental activities together as a single activity for material participation testing. The IRS’s chief counsel is disagreeing with the Bailey decisions. Nice!

In other words, the IRS clarified their version of chicken and egg. The formal election under Treasury Regulations 1.469-9(g) to group rental activities together is typically considered after qualifying as a real estate professional. If you cannot or choose not to elect your rental properties under the 1.469-9(g) regulations, it should not be used as a wedge to unravel your grouping of all real property trade or businesses for the sake of the 750 hours test.

Tilt!

Could you make a reasonable argument that you are relying on Chief Counsel Advice 201427016? Perhaps.

Being a Licensed Real Estate Agent

You do not have to be a licensed real estate agent or broker to be considered participating in a brokerage trade or business. However, a mortgage broker is not considered participating in a real estate trade or business. Chief Council Advice 201504010 states-

Webster’s Dictionary defines “real estate” as “property consisting of buildings and land; the business of selling land and buildings,” and defines “brokerage” as “the business of a broker” or the “broker’s fee or commission.”1 Webster’s defines a “broker” as “a person who helps other people… to buy and sell property.”2 Accordingly, the common and ordinary construction of “real property brokerage” for purposes of § 469(c)(7)(C) involves bringing together buyers and sellers of real property. This definition of “real property brokerage” does not include the brokerage of financial instruments.

Therefore the “financing” of real property such as by bringing together lenders and borrowers is not a real property brokerage trade or business within the meaning of §469(c)(7)(C).

Webster? Really?!

In Agarwal v. Commissioner, Tax Court Summary 2009-29, the IRS attempted to argue that an agent was not a licensed “broker” and thus could not be involved in a brokerage trade. Come on, IRS?! The Tax Court also relied the Webster definition of the term “brokerage” and found in favor the real estate agent.

Since obtaining a real estate license is a straightforward process with very few barriers to entry, WCG CPAs & Advisors recommends being licensed for two reasons. It buttresses your overall material participation argument, and you might have access to additional resources to help you with real estate investment (and you might save a few bucks on commissions too).

Hours Worked for a Real Estate Agent

IRC Section 469(c)(7)(D)(ii) and Treasury Regulations Section 1.469-9(c)(5), state that the employee must own at least 5% of the real property trade or business for the hours to count toward the real estate professional tests. As such, if you are a receptionist for a real estate developer, you cannot use those hours to satisfy the 750 hours test.