Want to Pay Less in Taxes? You Need This Designation (& May Already Qualify!)

Want to Pay Less in Taxes? You Need This Designation (& May Already Qualify!)

3 min read
Mary Hitchcock Read More

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Disclaimer: This is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal, tax, or other financial advice related to individual situations. Consult with your own attorney, CPA, and/or other advisor regarding your specific situation.

For those starting out in real estate investing, you may or may not have heard of the real estate professional (REP) designation. If you’re a seasoned vet, you’ve probably heard of this advantageous tax classification and are perhaps even already taking advantage of it!

There’s a good amount of information out there on what a REP designation is and who can qualify. However, for the sake of this blog post, I am going to go a little deeper and talk about how a REP designation affects cost segregation “losses.”

Whether you qualify or not, it is important for you to understand how cost segregation and the REP designation can go hand in hand. After all, as your portfolio increases (which I assume is your ultimate goal), so will your likelihood of being able to effectively use cost segregation as a REP.

For those who want a recap of what the REP designation entails, check out the next section. But if you already know what it’s about, skip to “The Real Estate Professional & Cost Segregation.”

Realtor showing house to a young couple wanting to rent it

What is a Real Estate Professional Designation?

REP is an IRS tax classification designed for those who work a certain number of hours each year within the real estate business. Having the REP designation is advantageous because you can deduct all depreciation and losses against income reported on your 1040.

Imagine the amount you can save on taxes as a REP! (If you don’t have the best imagination, I can tell you it’s a lot.)

On the flip side, those without a REP designation cannot deduct depreciation and losses from their ordinary income. For example, if Joe the investor owns three single family residences, is a W-2 employee, and does not qualify as a REP by the IRS’s standard, he cannot deduct his rental properties’ depreciation and losses against his W-2 income.

Related: The Ultimate Guide to Real Estate Taxes & Deductions

How to Qualify as a Real Estate Professional

In order to qualify as a REP, you must:

  1. Spend more than half your work time in a real estate business or businesses.
    • Activities may include (but are not limited to) redevelopment, leasing, acquisition, construction, operation, leasing, and rental.
  2. Work at least 750 hours for that business or those businesses.

Other tips and tricks to qualify:

  • If you’re married and either you or your spouse qualifies as a REP, whoever has the designation can use those losses to offset W-2 income.
  • If you own more than one real estate business, it is highly recommended to combine the businesses into one entity to satisfy the 750-hour rule. If not, you would be expected to spend 750 hours on each business. (Ain’t nobody got time for that!)

Real estate agent handing the house key

The Real Estate Professional & Cost Segregation

Cost segregation is a tax planning strategy used by smart real estate investors to accelerate depreciation on certain components of a property, in return lowering tax liability.

So where does cost segregation and REP come into play?

As I stated above, cost segregation reduces tax liability by using the depreciation captured as a written loss on your taxes. Cost segregation losses are considered passive losses (real estate losses) and can only be used to offset passive income. However, if you are a REP, you can use cost segregation’s losses against ordinary income!

Related: Why Real Estate Investors Need to Pay Attention to Cost Segregation

[ Disclaimer: This is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal, tax, or other financial advice related to individual situations. Consult with your own attorney, CPA, and/or other advisor regarding your specific situation. ]

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Want to learn how you could be saving more on your real estate taxes using loopholes, deductions, and more? Get the inside scoop from Amanda Han and Matthew MacFarland, real estate investors and CPAs, in Tax Strategies for the Savvy Real Estate Investor. Pick up your copy from the BiggerPockets bookstore today!

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Anything else I can answer about the REP designation or cost segregation?

Ask me in the comment section.