To qualify as a real estate professional, you must meet two time requirements.
1. You must spend more than 50 percent of your time in real estate activities in which you materially participate.
2. You must spend more than 750 hours in real estate activities in which you materially participate.
Real estate activities include real estate development, redevelopment, construction, reconstruction, acquisition, conversion, rental, management or operation, leasing, and brokerage. The hours you work as an employee in real estate activities do not count toward the two time tests unless you are also at least a 5 percent owner.
To materially participate, you need to meet only one of the following five tests for either the individual rentals or the group of rentals (if grouped).
1. You perform more than 500 hours of service.
2. You perform substantially all the services performed in the activities (as compared with services performed by others, including employees or outside contractors).
3. You perform more than 100 hours of service and perform more services than any other person.
4. You met the material participation test for any five out of the past 10 years.
5. You participate in the activity on a regular, continuous, and substantial basis, based on the facts and circumstances.
The IRS allows your rental properties and real estate activities to be automatically grouped for the more-than-50 percent and the more-than-750-hours rules. You do not need to make an election in your tax return to group your activities for these two tests.