Real Estate Professional
Most Popular Reply
Real Estate Syndicator · Milwaukee, WI · Member since 2018 · 1k+ posts · 907 votes
4yDefinitely a huge tax benefit of being real estate professional status. Especially if maximize your depreciation benefits. Accelerated depreciation through a cost segregation study + real estate professional status is a great combo!
19 Replies
- Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes4y
REPS only helps if your REis actually making losses that you can apply against active income. No losses, no point in REPS.
- 4yAshish AcharyaBusiness MemberCPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes
Quote from @Marcus Auerbach:
REPS only helps if your REis actually making losses that you can apply against active income. No losses, no point in REPS.
Not entirely correct Marcus.
INVESTOR FRIENDLY CPA®4.9242 Reviews - 4yAshish AcharyaBusiness MemberCPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes
Quote from @Adam Sieg:
Came across the concept of real estate professional recently and was curious if anyone had elected to pursue this status. I understand the time requirements and being part time the 50% shouldn't be an issue. Just curious if anyone had any thoughts or opinions on this. Thanks
Yes, there are thousands of people who do this every day.
INVESTOR FRIENDLY CPA®4.9242 Reviews - Member since 2021 · 10 posts · 2 votes4y
I'm currently a REPs person and my main goal is to reduce my tax load. The theory to my non expert mind is that there are 2 types of income- passive and non passive. w2 is non passive and you pay a significant amount of taxes depending on your income. WIth REPS you can take your passive losses (i.e. from rental income) and "apply" it to your W2. I'm doing this with my husband- where he is the W2 earner.
- Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes4y
Make sure you have enough losses for it to make sense. You greatly increase audit risk and if you make between under 100k with a cap at 150k you already get to write off $25k of losses anyways.
- Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes4y
@Account Closed has the right idea but instead of passive income vs non passive income it is passive income vs ordinary income.
If you are able to implement a real estate professional status tax strategy (REP) you can use passive losses from syndication deals to lower your ordinary W2 income. If not (ie two full-time working spouses) your only other option is going into land conservation deals, solar deals, or oil and gas deals - all of which have some risks.
Explained in a different way...
1) There are ordinary/W2/active income on one side. Lets call that the :( side.
2) And there is the happy side... passive income (syndications, passive partnerships ie medical/dentist offices) and passive losses (depreciation, bonus depreciation via cost segregations common in syndications). You can you passive losses to neutralize/eliminate passive income. Thats what this is the good side and why passive losses are called PALs too for passive activity losses.
So there is a barrier between 1) Active Income and 2) Passive Income above. You cannot offset passive losses (PALs) for active income. UNLESS you are are real estate professional status for tax designation purposes and able to create a "grouping/active participation".
Another example: Assume you invest $100,000 in a syndication and the cost segregation yields $20,000 of depreciation. You hold the asset for five years and it is sold for $150,000. You have $50,000 of capital gain and $20,000 of depreciation recapture. Assuming your capital gains tax rate is 20% and you made no further investment, you would owe tax of $10,000 on the gain and $5,000 on the recapture.
Now assume you took the $150,000 and invested it in a new syndication and got the same 20% cost seg, so $30,000 of depreciation. The new depreciation would first offset the $20,000 of recapture then the remaining $10,000 would offset some of the capital gain from the previous sale leaving you with $40,000 of gain. You would pay 20% tax on the $40,000 and the tax owed would be $8,000 rather than the original $15,000. If you have other passive loss that you have been carrying from other investments, that could be used to further defer and reduce the tax. - Real Estate Syndicator · Milwaukee, WI · Member since 2018 · 1k+ posts · 907 votes4y
Definitely a huge tax benefit of being real estate professional status. Especially if maximize your depreciation benefits. Accelerated depreciation through a cost segregation study + real estate professional status is a great combo!
- Rental Property Investor · Concord, GA · Member since 2015 · 3k+ posts · 3k+ votes4y
I'm a REP but have no W2 income. I'm not actually sure if it benefits our situation because we never have a loss on our rental activity. (some properties have losses but not the aggregate of them).
- Member since 2021 · 65 posts · 36 votes4y
I downloaded the REPS Tracker. Its a great tool that lets you categorize and keep track of every minute or hour spent. You can take pictures of receipts, I screen shot call logs, etc. but I will say it’s a rude awakening. It FEELS like I spend soooooo much time doing real estate activities and this app makes me realize my sense of time can be way off.
The IRS just received a LOT OF FUNDING this year with the intent to increase audits. Better dot your i’s and cross your tS. My Tax strategist and their CPAs will not endorse or file REPS status unless you have logs to prove it first. When you get audited, it is a 2-3 year process, too!
- Member since 2021 · 10 posts · 2 votes4y
Quote from @Henry Lazerow:
Make sure you have enough losses for it to make sense. You greatly increase audit risk and if you make between under 100k with a cap at 150k you already get to write off $25k of losses anyways.
Do you have a citation for that 25k write off? I’m in this situation and would love to know more- thanks!
Quote from @Account Closed:
I'm currently a REPs person and my main goal is to reduce my tax load. The theory to my non expert mind is that there are 2 types of income- passive and non passive. w2 is non passive and you pay a significant amount of taxes depending on your income. WIth REPS you can take your passive losses (i.e. from rental income) and "apply" it to your W2. I'm doing this with my husband- where he is the W2 earner.
Thanks for your comment - that was my understanding as well. I think the hang up I've had in pursuing is being able to document in event of being audited. It seems a lot of what I believe would be relevant may not actually be in the eyes of the IRS.
Quote from @Henry Lazerow:
Make sure you have enough losses for it to make sense. You greatly increase audit risk and if you make between under 100k with a cap at 150k you already get to write off $25k of losses anyways.
Thanks for that enough - I think between wife and I (shes W2 and I'm part time) we are around $200k. So in theory it could make sense. Appreciate your response!
Quote from @Lane Kawaoka:
@Account Closed has the right idea but instead of passive income vs non passive income it is passive income vs ordinary income.
If you are able to implement a real estate professional status tax strategy (REP) you can use passive losses from syndication deals to lower your ordinary W2 income. If not (ie two full-time working spouses) your only other option is going into land conservation deals, solar deals, or oil and gas deals - all of which have some risks.
Explained in a different way...
1) There are ordinary/W2/active income on one side. Lets call that the :( side.
2) And there is the happy side... passive income (syndications, passive partnerships ie medical/dentist offices) and passive losses (depreciation, bonus depreciation via cost segregations common in syndications). You can you passive losses to neutralize/eliminate passive income. Thats what this is the good side and why passive losses are called PALs too for passive activity losses.
So there is a barrier between 1) Active Income and 2) Passive Income above. You cannot offset passive losses (PALs) for active income. UNLESS you are are real estate professional status for tax designation purposes and able to create a "grouping/active participation".
Another example: Assume you invest $100,000 in a syndication and the cost segregation yields $20,000 of depreciation. You hold the asset for five years and it is sold for $150,000. You have $50,000 of capital gain and $20,000 of depreciation recapture. Assuming your capital gains tax rate is 20% and you made no further investment, you would owe tax of $10,000 on the gain and $5,000 on the recapture.
Now assume you took the $150,000 and invested it in a new syndication and got the same 20% cost seg, so $30,000 of depreciation. The new depreciation would first offset the $20,000 of recapture then the remaining $10,000 would offset some of the capital gain from the previous sale leaving you with $40,000 of gain. You would pay 20% tax on the $40,000 and the tax owed would be $8,000 rather than the original $15,000. If you have other passive loss that you have been carrying from other investments, that could be used to further defer and reduce the tax.Great thats super helpful information. Thank you!
- I will have to look at that. I'm worried that I wont be anywhere close to 750 hours especially since many of my properties have PM in place. Definitely helpful information though!
Quote from @Amy Konopka:
I downloaded the REPS Tracker. Its a great tool that lets you categorize and keep track of every minute or hour spent. You can take pictures of receipts, I screen shot call logs, etc. but I will say it’s a rude awakening. It FEELS like I spend soooooo much time doing real estate activities and this app makes me realize my sense of time can be way off.
The IRS just received a LOT OF FUNDING this year with the intent to increase audits. Better dot your i’s and cross your tS. My Tax strategist and their CPAs will not endorse or file REPS status unless you have logs to prove it first. When you get audited, it is a 2-3 year process, too!
- 4yBasit SiddiqiBusiness MemberAccountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
Make sure to document the hours into a log.
Also, speak with a professional to see what hours count and what hours don't count.
Basit Siddiqi CPA4.880 Reviews Quote from @Basit Siddiqi:
Make sure to document the hours into a log.
Also, speak with a professional to see what hours count and what hours don't count.Thank you for this - I've realized that it isn't exactly clear what qualifies for the hours vs what does not. I appreciate your insight!
- 4yMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
Quote from @Adam Sieg:
Quote from @Lane Kawaoka:
@Account Closed has the right idea but instead of passive income vs non passive income it is passive income vs ordinary income.
If you are able to implement a real estate professional status tax strategy (REP) you can use passive losses from syndication deals to lower your ordinary W2 income. If not (ie two full-time working spouses) your only other option is going into land conservation deals, solar deals, or oil and gas deals - all of which have some risks.
Explained in a different way...
1) There are ordinary/W2/active income on one side. Lets call that the :( side.
2) And there is the happy side... passive income (syndications, passive partnerships ie medical/dentist offices) and passive losses (depreciation, bonus depreciation via cost segregations common in syndications). You can you passive losses to neutralize/eliminate passive income. Thats what this is the good side and why passive losses are called PALs too for passive activity losses.
So there is a barrier between 1) Active Income and 2) Passive Income above. You cannot offset passive losses (PALs) for active income. UNLESS you are are real estate professional status for tax designation purposes and able to create a "grouping/active participation".
Another example: Assume you invest $100,000 in a syndication and the cost segregation yields $20,000 of depreciation. You hold the asset for five years and it is sold for $150,000. You have $50,000 of capital gain and $20,000 of depreciation recapture. Assuming your capital gains tax rate is 20% and you made no further investment, you would owe tax of $10,000 on the gain and $5,000 on the recapture.
Now assume you took the $150,000 and invested it in a new syndication and got the same 20% cost seg, so $30,000 of depreciation. The new depreciation would first offset the $20,000 of recapture then the remaining $10,000 would offset some of the capital gain from the previous sale leaving you with $40,000 of gain. You would pay 20% tax on the $40,000 and the tax owed would be $8,000 rather than the original $15,000. If you have other passive loss that you have been carrying from other investments, that could be used to further defer and reduce the tax.Great thats super helpful information. Thank you!
REPS has nothing to do with syndications. If you have passive investments in syndications, you usually cannot deduct the losses against your non-real-state income, REPS or not. https://www.biggerpockets.com/...
Lane's example is not of REPS but of a different strategy known as "lazy 1031": shielding gains from an old syndication that sold its assets by losses from a new syndication that acquired assets. It would work with or without REPS.
Join the conversationCreate a free account to reply, vote on answers and follow this thread.