Real Estate Professional Status & Taking Losses Against Full Time Income
Tampa, FL · Member since 2018 · 17 posts · 10 votes
Real Estate Professional Status & Taking Losses Against Full Time Income
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Rental Property Investor · Orange County, CA · Member since 2016 · 740 posts · 529 votes
3yI am not a CPA- but I have professional real estate status and it is something that you "self-vet" yourself. You don't need to be a realtor, anyone can get this Tax status and like
Kislay Shah said, the requirements are spelled out. You don't apply for it, it is basically you saying, yes - I fit this and then if you get audited the IRS will ask you for proof. So just track hours and time and you are fine, track every little thing she does from driving, calls, texts, reading, I mean everything just track.
I have a client that is professional real estate status she did not do a cost seg yet and got $144k last year as a tax deduction on her properties, bc she is prof real estate status that got carried to her combined taxes with her high earning spouse and LOWERED their tax bracket and taxes owed.
I personally have done cost segs and got HUGE HUGE tax benefits and took it all out so that I paid Zero federal taxes last year while my portfolio grew to over $4mil. So if you can get those hours its the gold mine for tax breaks!
Best of luck
13 Replies
- CPA · NY · Member since 2023 · 891 posts · 157 votes3y
In order to claim depreciation losses from rental properties against your other income, the properties must meet the IRS's definition of passive income or be classified as a real estate professional. If your wife is actively involved in real estate as a real estate professional, her income and losses from real estate activities can be combined with yours for tax purposes, even if the properties are in your name.
However, the IRS has specific criteria for qualifying as a real estate professional. You and your wife must meet the following requirements:
- More than 50% of your personal services must be in real property trades or businesses in which you materially participate.
- You must perform more than 750 hours of service during the tax year in real property trades or businesses in which you materially participate.
If your wife meets these criteria, you can potentially offset your insurance income with the rental property depreciation losses.
It's essential to work with a qualified tax professional to ensure that you are meeting all IRS requirements and to accurately calculate your depreciation and losses. Tax laws and regulations can be complex and subject to change, so professional guidance is crucial for making informed decisions.
- Rental Property Investor · Orange County, CA · Member since 2016 · 740 posts · 529 votes3y
I am not a CPA- but I have professional real estate status and it is something that you "self-vet" yourself. You don't need to be a realtor, anyone can get this Tax status and like
Kislay Shah said, the requirements are spelled out. You don't apply for it, it is basically you saying, yes - I fit this and then if you get audited the IRS will ask you for proof. So just track hours and time and you are fine, track every little thing she does from driving, calls, texts, reading, I mean everything just track.
I have a client that is professional real estate status she did not do a cost seg yet and got $144k last year as a tax deduction on her properties, bc she is prof real estate status that got carried to her combined taxes with her high earning spouse and LOWERED their tax bracket and taxes owed.
I personally have done cost segs and got HUGE HUGE tax benefits and took it all out so that I paid Zero federal taxes last year while my portfolio grew to over $4mil. So if you can get those hours its the gold mine for tax breaks!
Best of luck
- Tampa, FL · Member since 2018 · 17 posts · 10 votes3y
Quote from @Account Closed:
In order to claim depreciation losses from rental properties against your other income, the properties must meet the IRS's definition of passive income or be classified as a real estate professional. If your wife is actively involved in real estate as a real estate professional, her income and losses from real estate activities can be combined with yours for tax purposes, even if the properties are in your name.
However, the IRS has specific criteria for qualifying as a real estate professional. You and your wife must meet the following requirements:
- More than 50% of your personal services must be in real property trades or businesses in which you materially participate.
- You must perform more than 750 hours of service during the tax year in real property trades or businesses in which you materially participate.
If your wife meets these criteria, you can potentially offset your insurance income with the rental property depreciation losses.
It's essential to work with a qualified tax professional to ensure that you are meeting all IRS requirements and to accurately calculate your depreciation and losses. Tax laws and regulations can be complex and subject to change, so professional guidance is crucial for making informed decisions.
Yes she meets the REP criteria. I wasn't sure if we had to add her onto the properties, but it appears our current structure will work just fine. Thank you for your response!
- Tampa, FL · Member since 2018 · 17 posts · 10 votes3y
Quote from @Melissa Nash:
I am not a CPA- but I have professional real estate status and it is something that you "self-vet" yourself. You don't need to be a realtor, anyone can get this Tax status and like
Kislay Shah said, the requirements are spelled out. You don't apply for it, it is basically you saying, yes - I fit this and then if you get audited the IRS will ask you for proof. So just track hours and time and you are fine, track every little thing she does from driving, calls, texts, reading, I mean everything just track.
I have a client that is professional real estate status she did not do a cost seg yet and got $144k last year as a tax deduction on her properties, bc she is prof real estate status that got carried to her combined taxes with her high earning spouse and LOWERED their tax bracket and taxes owed.
I personally have done cost segs and got HUGE HUGE tax benefits and took it all out so that I paid Zero federal taxes last year while my portfolio grew to over $4mil. So if you can get those hours its the gold mine for tax breaks!
Best of luck
Thats amazing... hoping to do something similar this year. I was also informed that taking those losses does NOT affect your buying power as most lenders wont count depreciation/cost segs against you. - Rental Property Investor · San Francisco Bay Area · Member since 2022 · 1k+ posts · 1k+ votes3y
This is a great question.
- 1) More than 50% of your personal services must be in real property trades or businesses in which you materially participate.
- 2) You must perform more than 750 hours of service during the tax year in real property trades or businesses in which you materially participate.
For 2022, I met #2 mostly because of a local renovation I did with buying materials, meeting the contractor on site many times, and self managing this property. I also participate in decisions with my property management companies for the other properties, approving certain repairs, decisions with vendors, etc. I do my taxes with TurboTax and the CPA I talked to asked if I could answer "yes" to #1 (I haven't found a local recommended CPA yet). I don't think meet requirement #1 and my W2 job isn't related to real estate at all.
Is there a way to meet question #1 if we're filing single and working non-RE related W2 job with long term rentals? Is a cost segregation study necessary? I've heard that with short-term rentals it's easier to meet both requirements - I don't intend to do STRs.
- Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes2y
To answer your question about #1, no... Since a full time W2 job is ~2000 hours, you'd have to document >2001 hours of real estate related work. Thats a little tough. While some people hold two full time jobs, it usually knocks you out.
So, doing a cost segregation just documents a bunch of depreciation that you can can't take on your 1040 easily. So, it will be carried over and offset and future passive gains.
Just remember, that after you cost seg, that is the bulk of your depreciation. Once it runs out, you'll be back to paying taxes on the rental income that is "no longer" covered by the depreciation. So, "pay me now or pay me later." Also, unless you 1031, you'll have to pay that depreciation back to the IRS --- "no free lunch." Its one reason why I believe things like DST's only run for about 5 years since thats when the bulk of the depreciation runs out.
So, for the short term, cost seg can be really powerful.
Good luck.
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes2y
Quote from @Isaiah Tademy:
Quote from @Account Closed:
In order to claim depreciation losses from rental properties against your other income, the properties must meet the IRS's definition of passive income or be classified as a real estate professional. If your wife is actively involved in real estate as a real estate professional, her income and losses from real estate activities can be combined with yours for tax purposes, even if the properties are in your name.
However, the IRS has specific criteria for qualifying as a real estate professional. You and your wife must meet the following requirements:
- More than 50% of your personal services must be in real property trades or businesses in which you materially participate.
- You must perform more than 750 hours of service during the tax year in real property trades or businesses in which you materially participate.
If your wife meets these criteria, you can potentially offset your insurance income with the rental property depreciation losses.
It's essential to work with a qualified tax professional to ensure that you are meeting all IRS requirements and to accurately calculate your depreciation and losses. Tax laws and regulations can be complex and subject to change, so professional guidance is crucial for making informed decisions.
Yes she meets the REP criteria. I wasn't sure if we had to add her onto the properties, but it appears our current structure will work just fine. Thank you for your response!
What exactly does she do that shes spending a minimum of 15 hours per week on the rentals? Unless she is physically doing constant repairs herself, and doing the painting, and cleaning....I dont see how she will meet the minimum material participation hours.
District Invest Group545 Reviews - Rental Property Investor · Orange County, CA · Member since 2016 · 740 posts · 529 votes2yexactly! And, the more real estate you own, the easier to qualify - these are assets (little businesses that create income) So you are building your income with real estate.
Quote from @Isaiah Tademy:
Quote from @Melissa Nash:
I am not a CPA- but I have professional real estate status and it is something that you "self-vet" yourself. You don't need to be a realtor, anyone can get this Tax status and like
Kislay Shah said, the requirements are spelled out. You don't apply for it, it is basically you saying, yes - I fit this and then if you get audited the IRS will ask you for proof. So just track hours and time and you are fine, track every little thing she does from driving, calls, texts, reading, I mean everything just track.
I have a client that is professional real estate status she did not do a cost seg yet and got $144k last year as a tax deduction on her properties, bc she is prof real estate status that got carried to her combined taxes with her high earning spouse and LOWERED their tax bracket and taxes owed.
I personally have done cost segs and got HUGE HUGE tax benefits and took it all out so that I paid Zero federal taxes last year while my portfolio grew to over $4mil. So if you can get those hours its the gold mine for tax breaks!
Best of luck
Thats amazing... hoping to do something similar this year. I was also informed that taking those losses does NOT affect your buying power as most lenders wont count depreciation/cost segs against you. - 2yJulio GonzalezPro MemberSpecialist · West Palm Beach, FL · Member since 2008 · 4k+ posts · 1k+ votes
@Isaiah Tademy
Do you have a CPA that specializes in real estate taxation? Real estate has so many tax benefits and credits available, that I always tell people it's crucial to have a CPA that's extremely knowledgeable in this area. This would be an excellent question for them. I have worked with a number of great CPAs over the years and would be more than happy to provide you with recommendations if you'd like? - Tampa, FL · Member since 2018 · 17 posts · 10 votes2y
Quote from @Russell Brazil:
Quote from @Isaiah Tademy:
Quote from @Account Closed:
In order to claim depreciation losses from rental properties against your other income, the properties must meet the IRS's definition of passive income or be classified as a real estate professional. If your wife is actively involved in real estate as a real estate professional, her income and losses from real estate activities can be combined with yours for tax purposes, even if the properties are in your name.
However, the IRS has specific criteria for qualifying as a real estate professional. You and your wife must meet the following requirements:
- More than 50% of your personal services must be in real property trades or businesses in which you materially participate.
- You must perform more than 750 hours of service during the tax year in real property trades or businesses in which you materially participate.
If your wife meets these criteria, you can potentially offset your insurance income with the rental property depreciation losses.
It's essential to work with a qualified tax professional to ensure that you are meeting all IRS requirements and to accurately calculate your depreciation and losses. Tax laws and regulations can be complex and subject to change, so professional guidance is crucial for making informed decisions.
Yes she meets the REP criteria. I wasn't sure if we had to add her onto the properties, but it appears our current structure will work just fine. Thank you for your response!
What exactly does she do that shes spending a minimum of 15 hours per week on the rentals? Unless she is physically doing constant repairs herself, and doing the painting, and cleaning....I dont see how she will meet the minimum material participation hours.
She is a full time realtor as well as our property manager. Showings, open houses, etc...
- Tampa, FL · Member since 2018 · 17 posts · 10 votes2y
Quote from @Julio Gonzalez:
@Isaiah Tademy
Do you have a CPA that specializes in real estate taxation? Real estate has so many tax benefits and credits available, that I always tell people it's crucial to have a CPA that's extremely knowledgeable in this area. This would be an excellent question for them. I have worked with a number of great CPAs over the years and would be more than happy to provide you with recommendations if you'd like?Sending you a DM.
- 2yJason MuthPro MemberInvestor · Newburyport, MA · Member since 2015 · 58 posts · 40 votes
Quote from @David M.:
To answer your question about #1, no... Since a full time W2 job is ~2000 hours, you'd have to document >2001 hours of real estate related work. Thats a little tough. While some people hold two full time jobs, it usually knocks you out.
So, doing a cost segregation just documents a bunch of depreciation that you can can't take on your 1040 easily. So, it will be carried over and offset and future passive gains.
Just remember, that after you cost seg, that is the bulk of your depreciation. Once it runs out, you'll be back to paying taxes on the rental income that is "no longer" covered by the depreciation. So, "pay me now or pay me later." Also, unless you 1031, you'll have to pay that depreciation back to the IRS --- "no free lunch." Its one reason why I believe things like DST's only run for about 5 years since thats when the bulk of the depreciation runs out.
So, for the short term, cost seg can be really powerful.
Good luck.
Given where inflation is, I'd take "pay me now" over "pay me later" any day of the week. If you sell, you can always 1031 exchange and defer taxes (although your basis will indeed be lower because of all of the accelerated depreciation, you're still deferring it). And if you end up passing it on to an heir, there will be a stepped up basis.
- Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes2y
yup... just short term vs long term strategies...
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