My CPA Doesn’t find benefit in Real Estate Professional Status

Tax, SDIRAs & Cost Segregation
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My CPA Doesn’t find benefit in Real Estate Professional Status

Lauryn Meadows
Ironton, OH · Member since 2015 · 104 posts · 31 votes

Question for my Investher CPAs.

My husband works full time in our real estate business, I believe he should have no problem qualifying for real estate professional status.

I work at W2 and have a 1099. We also flip houses.

We purchased and rehabbed a 4 plex this year, that I would like to take accelerated depreciation on to offset income from my W2/ 1099 and our flipping business.

Question 1- did I need to have a cost segregation study done in 2021 in order to do this?

My CPA says we don’t want for my husband to qualify as a real estate professional status because he will be subject to self employment tax, and not receive social security credits (not super concerned about that because the plan is to be FI long before social security kicks in- if it’s even a thing by the time we are that age.)

Thanks for any advice. 

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Natalie KolodijBusiness Member
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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
4y

Your CPA is an idiot. 

Find one who specializes in real estate taxation. 


RE pro doesn't default your income to SE tax. 

Your flips should already be paying SE tax. Your rental income will be non-passive (allowing losses) but still not subject to SE tax even if he's re pro. 


You do need a cost seg, and then you can absolutely use that loss to offset your other income if he qulaifies. 

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  • Russell BrazilBusiness Member
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    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    4y

    Anyone who is self employed is subject to self employment taxes regardless of whether they are a real estate professional or not.

    How many properties do you have?

    Has he maintained a log of his daily activities from 2021?

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  • Natalie KolodijBusiness Member
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    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    4y

    Your CPA is an idiot. 

    Find one who specializes in real estate taxation. 


    RE pro doesn't default your income to SE tax. 

    Your flips should already be paying SE tax. Your rental income will be non-passive (allowing losses) but still not subject to SE tax even if he's re pro. 


    You do need a cost seg, and then you can absolutely use that loss to offset your other income if he qulaifies. 

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes
    4y

    I have heard this when pros don’t know how to deal with the complications. Please work with another professional. 

    You have a huge tax saving potentials!!

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  • Yonah WeissPro Member
    Cost Segregation Expert and Investor · Lakewood, NJ · Member since 2017 · 1k+ posts · 1k+ votes
    4y
    Quote from @Natalie Kolodij:

    Your CPA is an idiot. 

    Find one who specializes in real estate taxation. 


     Best answer LOL

    1Reply
  • Yonah WeissPro Member
    Cost Segregation Expert and Investor · Lakewood, NJ · Member since 2017 · 1k+ posts · 1k+ votes
    4y
    Quote from @Lauryn Meadows:

    Question for my Investher CPAs.

    My husband works full time in our real estate business, I believe he should have no problem qualifying for real estate professional status.

    I work at W2 and have a 1099. We also flip houses.

    We purchased and rehabbed a 4 plex this year, that I would like to take accelerated depreciation on to offset income from my W2/ 1099 and our flipping business.

    Question 1- did I need to have a cost segregation study done in 2021 in order to do this?

    My CPA says we don’t want for my husband to qualify as a real estate professional status because he will be subject to self employment tax, and not receive social security credits (not super concerned about that because the plan is to be FI long before social security kicks in- if it’s even a thing by the time we are that age.)

    Thanks for any advice. 

     Lauryn,

    I'm glad one of our mutual friends connected us elsewhere, and I found you here! @Natalie Kolodij & @Ashish Acharya both answered what I shared with you as well 😊

    0Reply
  • Paul Cook
    Investor · Tampa, FL · Member since 2016 · 5 posts · 2 votes
    4y

    Met with my CPA today and basically said that my long term rentals and the land that I purchased and working on in preparation for construction of a STR has absolutely no tax benefits at all. I fail to see why people suggest that real estate is helpful in tax savings of any kind. I felt misled and discouraged.

    0Reply
  • Bruce D. Kowal
    Metro NY + New Bedford · Member since 2022 · 294 posts · 216 votes
    4y
    Quote from @Paul Cook:

    Met with my CPA today and basically said that my long term rentals and the land that I purchased and working on in preparation for construction of a STR has absolutely no tax benefits at all. I fail to see why people suggest that real estate is helpful in tax savings of any kind. I felt misled and discouraged.


     When you purchase any building with cash + loan, you are taking advantage of the most basic tax shelter feature of real estate.  Say that you put 20% cash and borrow 80%.  You then write-off the cost of 100% or the building.  That is Depreciation. 

    You are taking expenses [the 80%] for something for which you did not shell out any cash. Now, that is the tax savings.  In addition, the cost of that borrowing, the interest expense, is allowed as a reduction in your income.  

    But it's that leverage from borrowing, the ability to generate "phantom" expenses that is the heart of the real estate tax advantage. Why "phantom"?  Did you actually shell out cash for that extra 80% of depreciation?  

    And this is something that is granted by Congress.  It's not a Natural Right bestowed by the Creator . . .

    Now, if you simply pay all cash for land, and develop the land with a building with zero financial leverage as described above, there is no benefit. 

    When and if you rent that new building, well, that is another discussion.  

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