First, for those who don't know what this means, let's explain it with an example:

Let's say you purchase a property for $150,000 of which $20,000 is the value of land and the rest the value of building and improvements. With 50% depreciation, you get to write off half of the value of the structure which is $65,000 times your tax bracket. So, if you have a 30% tax bracket, that's $19,500 worth of tax write-off IF YOU ARE A REAL ESTATE PROFESSIONAL.

So is this for real? YES. Can you qualify for it? There are ways you can and here they are:

There are 7 ways to become a real estate professional according to our CPA. But you have to consult your own CPA or tax advisor/attorney. Don't just take our word for it.

Here is the document provided by our CPA showing the 7 ways to become a real estate professional and therefore, qualify for the 50% depreciation. Again, DO CONSULT YOUR OWN CPA.

When is an activity “Passive”

Participate in an activity and the manner in which the taxpayer may prove material participation are some of the topics discussed within the following material.

“Participation” defined

What type of work is counted toward satisfying the standard of “material participation”? Although the IRS regulations contain several exceptions (see below), the general rule is that any work done by an individual in connection with an activity in which he owns (directly or indirectly, other than through a C corporation) an interest at the time the work is done is treated as “participation” by the individual. The capacity in which the individual performs the work is immaterial (60.).

If the individual is married during the tax year, any participation by his spouse in the activity during the tax year is treated, for purposes of the tests for material participation, as participation by the individual. This rule applies without regard to whether or not the spouses file a joint tax return for the year (65.).

The following work is not treated as “participation” by an individual (70):

1. Work that is not of a type customarily done by an owner of an activity, if one of the principal reasons for the performance of the work is to avoid the application of the passive loss rules; and


2. Work performed by the individual in his capacity as an investor, unless the individual is directly involved in the day-to-day management or operations of the activity. The phrase “work performed in the capacity of an investor” includes:
   1. studying and reviewing financial statements or reports on the operations of the activity;
   2. preparing or compiling summaries or analyses of the finances or operations of the activity for the individual’s own use; and
   3. monitoring the finances or operations of the activity in a non-managerial capacity

Seven alternate tests for material participation

Except for special rules that apply to limited partners (see 10,515), certain retired or disabled farmers (see below), and personal service and closely held corporations (see 10,520), an individual will be treated as materially participating un an activity during any given tax year if he satisfies any one of the following seven tests (.15):

Test 1
The individual participates in the activity for more than 500 hours during the tax year;

Test 2
The individual’s participation in the activity for the tax year constitutes substantially all of the participation in the activity of all individuals (including non-owners) for the year;

Test 3
The individual participates in the activity for more than 100 hours during the tax year, and his participation for the tax year is not less than the participation of any other individual (including non-owners) for the year;

Test 4
The activity is a “significant participation activity” (see “Significant participant activity”, below) for the tax year, and the individual’s aggregate participation in all his significant activities during the year exceeds 500 hours;

Test 5
The individual materially participated in the activity for any five tax years, whether or not consecutive, during the 10 tax years that immediately preceded the tax year in question;

Test 6
The activity is a personal service activity (see “Personal service activity” below), and the individual materially participated in the activity for any three tax years, whether or not consecutive, preceding the tax year in questions; or

Test 7
Based upon a facts-and-circumstances test (see “Facts and circumstances”, below) the individual participates in the activity on a regular, continuous, and substantial basis during the tax year in question

Significant-participation activity

A significant-participation activity is a trade or business in which the taxpayer significantly participates but does not materially participate under any of the above seven tests other than Test 4. An individual will be treated as significantly participating in an activity for a tax year if and only if he participates in the activity for more than 100 hours during the tax year (.20).
The importance of having an activity raised to the level of one in which the taxpayer significantly participates is that significant participation is one of the seven ways in which the taxpayer may satisfy the requirements of being a “material participant” (.30). If the taxpayer is treated as a material participant, then the activity will not be treated as a passive activity and its losses may be used as a deduction against non-passive income (e.g., wages and interest).
However, in order to have a significant-participation activity classified as a material participation activity, the individual’s aggregate participation in all his significant –participation activities during the tax year must exceed 500 hours (.35).
Example 1: Betty Jones has an ownership interest in five separate activities. Her participation in each of the activities during the year was as follows: Activity A, 110 hours; Activity B, 100 hours; Activity C, 125 hours; Activity D, 125 hours; and Activity E, 130 hours. Jones was not a material participant in any of the five activities during the year under any test other than the significant participation test.
Jones does not qualify as a material participant because her aggregate participation in all her significant-participation activities did not exceed 500 hours. While Activities A, C, D, and E qualify as significant-participation activities because her participation in each activity was more than 100 hours during the year, Activity B does not qualify because her participation was just 100 hours. Thus her participation in significant-participation activities totaled 490 hours for the year. Because the amount of her participation did not qualify her as a material participant, all five activities are subject to the passive loss rules.
Example 2: Assume the same facts as in Example (1), above, except that Jones’s participation in Activity A during the year totaled 121 hours. In this situation her aggregate participation in Activities A, C, D and E totaled 501 hours for the year. Because her aggregate participation in significant-participation activities exceeded 500 hours, she will be considered as having materially participated in the four significant-participation activities. Activity B would still be considered as a passive activity because her participation did not exceed 100 hours.

Personal service activity

An activity will be considered as a personal service activity for the purpose of the sixth test for material participation (see above), if the activity involves the performance of personal services in:

1. the field of health, law, engineering, architecture, accounting, actuarial science, the performing arts, consulting or
2. any other trade or business in which capital is not a material income-producing factor (.40).