Do I have to pay myself an hourly rate to be a RE Professional?

Question

Hello Everyone! Like a good number of you fellow investors, my spouse has a W2 and I am building up our portfolio by BRRR'ing. Between finding the properties, buying, fixing up, and renting out- I'm sure I'm easily going to hit the 750 hour cutoff to be a pro according to the IRS. But here's where I need your advice: do I need to pay myself for those hours? That would add a level of complexity on top of filing for the LLC's that I wasn't anticipating (payroll tax, etc.)

So, do I need to pay myself? Or can I just count the cashflow as income?

Thank You In Advance!

Clint LeClair

So, do I need to pay myself? Or can I just count the cashflow as income?

Thank You In Advance!

Clint LeClair

Natalie Kolodij · Answer

You are actually not allowed to pay yourself unless you're structured as a corporation.

Who are you currently filing payroll for out of your LLC? How is your LLC structured? 1 member, 2 mebers, S corp?

If it's for rentals it really shouldn't be a corp of any type typically.

There are a LOT of tracking requirements and items that do and don't qualify for real estate professional, and this is something the IRS tends to Look at.

If you're basing it on rentals you likely will need to elect to combine them into one activity, and that has tax implications with regard to earlier losses. Also if based on rentals time spent reviewing new deals is arguably not a qualified activity. You need to be keeping an ongoing log of time spent on what specific activities.

I would sit down with your Tax pro and go over everyhting to make sure you're compliant.

Steven Hamilton II · Answer

Hi Clint,

As @Natalie Kolodij you do not have to pay yourself a wage. The net cash flow is your income at year end.

Natalie Kolodij · Answer

@Steven Hamilton II is an excellent tax pro and also based in IL- I would recommend trying to get an appointment with him to make sure you're set up correctly.

Natalie Kolodij · Answer

Being paid a salary has NOTHING to do with real estate professional.

So yourself and your wife on an LLC created a partnership and you'll need to file a 1065 Partnership Tax Return- unless you're in a community property state.

What I'm saying is that different entities have different rules for how you can/can not pay yourself.

You literally are NOT allowed to pay yourself a w2 salary in a partnership or disregarded LLC.

Clint LeClair · Answer

Hi Natalie, yes, these are rentals that I'm BRRR'ing, and my wife and I are the only members in the LLC. The key question I'm asking is, I'm putting in hundreds of hours and meeting the other requirements but am unsure if just taking the disbursements is enough, or I have to actually pay myself in order to be a RE Professional?

Do I have to pay myself an hourly rate to be a RE Professional?

Do I have to pay myself an hourly rate to be a RE Professional?

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