Real Estate Professional for tax purposes question

6 Replies

I have a question that I am hopeful someone here will know.  For tax purposes, the real estate professional designation is something that is very helpful if you are an investor.  Would a home inspector be able to claim this designation for tax purposes?  I know that property managers such as people running apartment complexes can claim this. However, if an investor was also a home inspector for his primary income, would this qualify him as a real estate professional for tax purposes, thus removing the $25,000 cap for depreciation loses?

Jimmy,

IRC 469(c)(7)(C) states that the following "personal service" activities will qualify you for the designation: 

... real property development or redevelopment, ... real property construction or reconstruction; ... real property acquisition; ... real property conversion; ... real property rental; ... real property operation; ... real property management; ... real property leasing; or ... real property brokerage. 

To me, it wouldn't appear home inspection would fall under any of these designations. You'll note that property managers fall under the management criteria above. 

Nathaniel Busch, CPA 

The $25K "cap" (special allowance, really) is for passive losses, not depreciation.  Hopefully your rentals actually produce some income.

Also be aware that as you take or are allowed deprecation the basis in your property is reduced by that amount (taken or allowed, which ever is greater).  This increases your gain when you sell.  If you do have disallowed carry forward passive losses you can use this to offset the gains on the sale.  So, while avoiding the cap on passive losses may get you a deduction sooner, you'll have to mostly pay this back later, if you sell.

I hope nobody minds me jumping in on an old thread, but this seemed the best place to ask this question after a little bit of searching around.  I also have the same frustration with my CPA not seeming to have a strong understanding of the Real Estate Professional status.

So, here is my question, asking for a friend... My friend is a professional commercial property manager, managing office buildings mostly. He also has a single family rental property that was formally a primary residence, but has been a full time rental property for several years. He self-manages and performs all other functions for the property such as leasing/marketing and most repairs and maintenance, except for hiring contractors for minor jobs totalling less than $1,000 per year. He has substantial losses in the $10-15K area annually from the activity of renting this SFH (the property is significantly underwater). Does the rental of this property fall under the "Not Passive Activity", ie, does he qualify as a Real Estate Professional and thus not required to count this loss as passive? Or, is there further information that would be needed to answer?

Thanks!

@Jimmy Wilson

There is no cap on depreciation. There is no cap on residential real estate losses. There is a $25K cap, however, on the amount of your residential real estate activity loss that can be used to offset your other ordinary income.

I would guess that a real estate appraiser is in a real estate related activity that could be used to qualify for real estate professional status. BUT, just being an appraiser is not the qualification.  There are ownership rules, material participation rules, and hours of personal services contribution rules to consider.

@Chris Gaffney

If your friend's annual net passive loss from residential rental property is less than $25K, your friend is allowed to deduct the amount of his passive loss from other ordinary income.  Real Estate Professional status is only required to deduct net passive losses from residential real estate activities that exceed $25K.

I should mention that modified adjusted gross income is over $100K.  The question is really whether this rental qualifies as "not passive"?

Thanks again!

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