Could REPS make tax savings more valuable than cash flow?

Member since 2018 · 4 posts · 1 vote

My husband works for a commercial developer (W-2) and is a small owner (K1) so our understanding is that he qualifies for REPS. We're looking at buying an STR to self-manage but with rates and prices where they are, the cash flow projections are dismal. However, I think, with REPS, we can deduct the expenses and depreciation against his W-2/K1 income which make the overall picture look appealing. Am I thinking of this the wrong way?

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Kelly O'Keefe

Accountant · NC · Member since 2023 · 123 posts · 163 votes

Hi @Kathleen Rogers

REPS is a very powerful tax strategy that can offset W-2 income. However, STR will not count towards REPS. You can still take the STR Loophole which will have a similar strategy to offset taxes. Depending on the amount that is offset it could be beneficial even if the property has a low cash flow.

Hope this helps

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Kelly O'Keefe
Accountant · NC · Member since 2023 · 123 posts · 163 votes
2y
Hi @Kathleen Rogers
REPS is a very powerful tax strategy that can offset W-2 income. However, STR will not count towards REPS. You can still take the STR Loophole which will have a similar strategy to offset taxes. Depending on the amount that is offset it could be beneficial even if the property has a low cash flow.
Hope this helps
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Scott TrenchPro Member
Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
2y
First, you don't need REPS status for the STR loss benefits.
Second, REPS is a double edged sword. Translating passive real estate losses into active ones can be good for a while, but then you have the active gains on exit at the end. Don’t go out of your way to put yourself on a REPS treadmill you can never get off unless you fully commit to the decades or lifetime of defer defer defer and never realize the income.
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Jason WatsonBusiness Member
CPA · Colorado Springs, CO · Member since 2024 · 98 posts · 83 votes
2y
Let's not forget the avoidance of net investment income tax with REP status as well. Sure, most people want to leverage deducting passive losses... but one day you might have net profit that could be whacked with a 3.8% NIIT.
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
2y
Quote from @Kathleen Rogers:

My husband works for a commercial developer (W-2) and is a small owner (K1) so our understanding is that he qualifies for REPS. We're looking at buying an STR to self-manage but with rates and prices where they are, the cash flow projections are dismal. However, I think, with REPS, we can deduct the expenses and depreciation against his W-2/K1 income which make the overall picture look appealing. Am I thinking of this the wrong way?

Yes, you're missing important pieces.

First, as already pointed out on this thread, REPS is unrelated to STR. Your husband does not qualify for REPS anyway, but you do not need REPS to benefit from the so-called STR loophole.

More importantly, STRs typically create large tax losses in the first year only.

Most importantly, taxes are never a good reason to choose a poorly performing investment, IMHO.

Read this post: https://www.biggerpockets.com/forums/51/topics/1122635-the-s...

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Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
2y
The hours working as a W-2 employee may potentially not count towards the hours requirement if you are not an above 5% owner...
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Kathleen Rogers
OP
Member since 2018 · 4 posts · 1 vote
2y
Quote from @Michael Plaks:

Quote from @Kathleen Rogers:

My husband works for a commercial developer (W-2) and is a small owner (K1) so our understanding is that he qualifies for REPS. We're looking at buying an STR to self-manage but with rates and prices where they are, the cash flow projections are dismal. However, I think, with REPS, we can deduct the expenses and depreciation against his W-2/K1 income which make the overall picture look appealing. Am I thinking of this the wrong way?

Yes, you're missing important pieces.

First, as already pointed out on this thread, REPS is unrelated to STR. Your husband does not qualify for REPS anyway, but you do not need REPS to benefit from the so-called STR loophole.

More importantly, STRs typically create large tax losses in the first year only.

Most importantly, taxes are never a good reason to choose a poorly performing investment, IMHO.

Read this post: https://www.biggerpockets.com/forums/51/topics/1122635-the-s...

Can you explain why he doesn't qualify for REPS? A casual conversation with another CPA told us that he is so I'm not sure what I've shared that tells you he doesn't qualify?
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
2y
Because he is a W2 employee and, I assume, he is not one of the company owners. It does not matter that his job is in real estate, it is a W2 job and therefore does not count.

Not bad news for you however, because you do not need REPS with STRs.
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Kathleen Rogers
OP
Member since 2018 · 4 posts · 1 vote
2y
Quote from @Michael Plaks:
Because he is a W2 employee and, I assume, he is not one of the company owners. It does not matter that his job is in real estate, it is a W2 job and therefore does not count.

Not bad news for you however, because you do not need REPS with STRs.
Thanks for clarifying; he is both W-2 and a K1 partner at 5% so I believe he does qualify for REPS. I realize in the STR discussion it doesn't matter but it may apply in other situations.
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
2y
Quote from @Kathleen Rogers:

Quote from @Michael Plaks:
Because he is a W2 employee and, I assume, he is not one of the company owners. It does not matter that his job is in real estate, it is a W2 job and therefore does not count.

Not bad news for you however, because you do not need REPS with STRs.
Thanks for clarifying; he is both W-2 and a K1 partner at 5% so I believe he does qualify for REPS. I realize in the STR discussion it doesn't matter but it may apply in other situations.
This is a great illustration of the perils of online forums. You did not mention him being a 5% owner before. No wonder you were getting conflicting answers. We cannot give you an accurate answer without having ALL the facts.

If he is a 5% owner, his hours would qualify for REPS, as long as his job duties are qualified real estate activities. Example: If he is supervising construction crews - yes. If he is a bookkeeper - no.
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Jason WatsonBusiness Member
CPA · Colorado Springs, CO · Member since 2024 · 98 posts · 83 votes
2y
Shocker... a tax pro not getting all the information on the first or second go-around.
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