When Rentals Do Not Qualify as a Business
February 23, 2024
When Rentals Qualify as a Business
February 23, 2024

February 24, 2024 | read

How to Prove Your Landlording Business is “For Profit”

Brandon Hall

How to Prove Your Landlording Business is “For Profit”

Earning a profit in your rental activity proves you are a business owner and not just an investor. Here’s how you prove your rentals are “for profit.”

3 of 5 year test

If your rental activities earn a profit in three of the past five years, the IRS must preclude that you are operating a business. If you cannot meet this test, you run the danger of being classified as an investor, but that’s also why we have a “behavior” test.

Behavior test

You can operate rentals at a loss every single year and still qualify as a business owner as long as you meet the behavior test. The following factors are what and the auditor will use to judge if your behavior is profit motivated, the first three being the most important:

  • How the activity is carried on – do you act as a business would?
  • The landlord’s expertise – what is your knowledge and skill level of real estate?
  • The time and effort spent – how much time do you spend on your rental activities compared to your other activities?
  • Your track record
  • Your history of income and losses
  • Your profits
  • Appreciation of the real estate
  • Your net worth
  • What you do for fun and recreation

To pass the behavior test, you must maintain good records. Keep your accounting clean and a log of the time you spend on all of your activities. Establish your expertise through guest blogs and podcasts and document that you feel your real estate will appreciate in value.

See When Rentals Qualify as a Business and When Rentals do not Qualify as a Business for more information.

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