Real Estate Professional Status – Can I Use My Husband’s Passive Losses?

Question

Hi BP Community,

I’m looking for some clarity on the tax implications of becoming a Real Estate Professional.

My husband is a high W-2 income earner, and I’m considering leaving my job to qualify as a Real Estate Professional (REP) to take advantage of potential tax benefits. He currently owns 4 rental properties that he purchased before we were married, and they are still titled solely in his name.

My question is:

If I qualify as a Real Estate Professional, and we file jointly, would I be able to materially participate in his properties — and, if so, would we be able to use the passive losses from those rentals to offset his W-2 income?

Additional questions:

• Would it be beneficial for him to sell 1% ownership of those 4 properties to me, so I’m technically a co-owner and can more clearly establish material participation?
• 
• Going forward, we plan to form an LLC with 50/50 ownership to acquire new investment properties — how will that affect our ability to use losses?
• 
• What about different types of properties like turnkeys, syndications, or other passive investments — do those losses count toward what we can use to offset W-2 income if I qualify as a REP?

Would love to hear from anyone who’s navigated this or has insight into how the IRS views ownership and participation in these scenarios.

Thanks in advance!

Michael Plaks · Answer

@Sara Murphy

Before I answer your specific questions, let me comment that I cannot agree with quitting a job if it is done for tax benefits. If you have other reasons to quit your job, then it's a different conversation, and then tax benefits can come as a bonus. Icing on the cake, not the cake.

To illustrate my position, you know who really should quit their job for tax benefits? Your husband! Without all this income of his your taxes will go waaaayyy down. :)   See what I mean? Taxes cannot drive your life decisions.

One other very important point: we don't have any numbers on your overall tax situations, especially on your husband's rentals. Without this information, we cannot estimate how much tax benefits there is to go after, to begin with. Maybe a lot, and maybe not so much. Figuring this out should come first, before going for REPS.

And last thing: it may not be easy for you to qualify for REPS with these 4 properties if they all have stable long-term tenants. But this is also a different topic.

To your questions:

- yes, you can work on his properties

- no, your ownership is not required

- your potential LLC will not save you any taxes

- but an LLC can hurt you in more than one way, depending on your state

- LLCs are created for legal liability reasons, not for tax reasons

- passive investments will not help you tax-wise, most likely, but it's a topic too broad to address in a forum post, it's for a tax professional consultation. Here is a long and technical post on this topic, however it's for general education and not to draw conclusions for specific situations, as your mileage will likely vary:https://www.biggerpockets.com/forums/51-tax-legal-issues-con...

- the most common way to combat high W2 taxes using real estate is with short-term rentals (STRs), but it is also a separate topic. You can start here: https://www.biggerpockets.com/forums/51/topics/1122635-the-s...

Sean O'Keefe · Answer

First, before you quit your job to take advantage of the tax benefits of Real Estate Professional Status (REPS) you may want to find a tax professional who can help you navigate the best Tax Strategy for your specific goals and tax profile and filing.

To answer your questions about REPS.

• To offset non-passive income (e.g. W-2, 1099, etc.) with long-term rental (LTR) rental losses you must meet the IRS requirement for REPS (below) AND you also must materially participate in each of the rental properties or make a grouping election (note: risks to grouping election you’ll want to clarify).More than 50 percent of your time in real estate trade or business (e.g. rentals, construction, real estate agent, etc.)More than 750 hours of service during the year.
• More than 50 percent of your time in real estate trade or business (e.g. rentals, construction, real estate agent, etc.)
• More than 750 hours of service during the year.
• For married couples who file jointly, only one spouse needs to qualify as a real estate professional.
• Material participation has 7 tests. You must meet one of the 7 tests.
• Unlike with REPS, for married couples who file jointly, the hours of both spouses can be combined to meet material participation.

• More than 50 percent of your time in real estate trade or business (e.g. rentals, construction, real estate agent, etc.)
• More than 750 hours of service during the year.

Note that 4 LTR rental properties may not be enough work for you to justify 750 hours to meet REPS. You could explore combining hours from management of 4 LTR rentals with another hours from another real estate business.

Answers to your “Additional questions”:

• Would it be beneficial for him to sell 1% ownership of those 4 properties to me. No, this wouldn’t be beneficial for leveraging REPS / material participation to provided you meet the above requirements I listed in # 1- 4. You don’t need to own 1% to do this.
• Going forward, we plan to form an LLC with 50/50 ownership to acquire new investment properties — how will that affect our ability to use losses. Forming an LLC is for “Personal Asset Protection” and doesn’t impact your ability to leverage REPS / Material Participation. You should get both a LLC and Landlord insurance as part of your “Personal Asset Protection” strategy.
• What about different types of properties like turnkeys, syndications, or other passive investments — do those losses count toward what we can use to offset W-2 income if I qualify as a REP? Unless you materially participate in the “turnkeys, syndications, or other passive investments” it’s unlikely that these would help offset your W-2 income. I say unlikely because there are a couple of other options, like STR or Grouping Election, but are beyond the scope of this post.

The tax benefits of REPs can be significant when combined with the right tax strategies. As a result, it’s worth it to invest in getting a strong Real Estate Tax Pro that can help guide you through maximizing the benefits of REPS and accurately filing.

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This post does not create a CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.