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Browse the siteDecember 13 2016
Many real estate agents work only part time, or work at real estate for a while and then leave the field. If you're in this situation and you don't earn a profit from your real estate activity, the IRS could claim that you are not really in business. Let's go over how to handle this, as well as some other important real estate tax tips.
For tax purposes, a business is an activity you regularly and continuously engage in primarily to earn a profit. You can't get a real estate license, sit back and do nothing and then claim you had a profit motive. This won't pass the "smell" test. You need to be able to show that you were actively working to make money by trying to obtain listings or close sales or something else.
It's also not necessary to show a profit every year to qualify as a business. You just need to be able to prove that your primary purpose is to make money. Many businesses have losses in their first year—and some may continue to have losses on and off for years afterwards. That's okay as long as you can establish that your intent was to earn a profit.
Your real estate business can be conducted from home, full time or part time, as long as you work at it regularly and continuously. And you can have more than one business at the same time—many real estate agents work part time and have other businesses or jobs. However, if your primary purpose for being a real estate agent is something other than making a profit—for example, to incur deductible expenses—the IRS may find that your activity is a hobby and not a business. If this happens, you'll face some potentially disastrous tax consequences.
The IRS has established two tests to determine whether someone has a profit motive. One is a simple mechanical test that looks at whether you have earned a profit in three of the last five years. The other is a more complex test designed to determine whether you act like you want to earn a profit.