I wanted to describe a situation and see if anyone can tell me what the tax implications are:

You get your real estate license to help with your part-time investing business and don't use it as a typical agent would. That is, you're not out there trying to sell people houses, not even your rehabs. You're a part time flipper that does 2-3 deals a year and has a regular W-2 job. You do all of your area/property research from home in your spare time.

Would you have to pay a self employment tax or a home office tax since you're now a licensed real estate agent? Or, would those not apply because you're doing it part time?

Asking for a friend...

Dennis,

 I am not a CPA, but i believe because a licensed is held as a real estate professional you would now have to pay self employment tax, you are not working for someone and it is not considered passive income. your home office space is actually tax deductible at that point, you do not pay tax on it. but there may be a percentage involved that you can deduct if you are only doing it part time and have a W2 job. so if your office uses 5% of your house, you can deduct only 5% of your expenses, but throw in that it is part time, you may only be able to deduct say 25% of that 5% of space, best you talk to your CPA on that. 

For Self Employment tax purposes Revenue Ruling 58-112 characterizes a trade or business activity as one that is regular, frequent and continuous. The regularity of activities and transactions and the production of income are important elements. However in the end this is a judgement call, see the cited Rev Rul above and the following article for specific guidance:

https://www.journalofaccountancy.com/issues/2011/oct/20114408.html

@Christopher Smith , i just read that article, that's very interesting, but it still says at the bottom of the article that it all depends on the frequency of the activity. Flipping a house, even if Dennis does 2-3 a year, still takes months to complete plus if he has a home office in which he runs the flips from and researches for new property all while taking the tax deduction for it, is all running a business and i would be very careful playing that game

Originally posted by @Patrick Liska :

@Christopher Smith, i just read that article, that's very interesting, but it still says at the bottom of the article that it all depends on the frequency of the activity. Flipping a house, even if Dennis does 2-3 a year, still takes months to complete plus if he has a home office in which he runs the flips from and researches for new property all while taking the tax deduction for it, is all running a business and i would be very careful playing that game

Agreed, this is a highly subjective fact intensive determination and border line cases are notoriously difficult to predict, with selected outcomes at times being contrary to what one would expect. Additionally, because of the general theme of uncertainty in this area there is no guarantee of consistency among Government auditors, some might challenge your call and others might not.

When I look at what is being done in your case, my greatest concern is that while the activity is only part time and you are not actively holding your self out to the public as conducting these activities, the activities are being performed with a certain degree of regularity and frequency that might make it difficult to rebut an auditor's challenge that you are actively conducting a trade or business. The threshold for which in my experience is relatively low.

I have had to face this issue in performing Executor and Trustee duties over the years. I have concluded that my work in those cases was not SE income primarily because I have only performed them for people who have named me in their Estate Planning Documents (none of which I encouraged) and have never offered those services beyond that. That is restrictive enough in my estimation not to constitute the degree of regularity necessary for SE income, but in your case you have (I think) gone well beyond that restrictive threshold.    

@Christopher Smith

@Patrick Liska

The article you are referring to was written in 2011.  Times have changed a bit, the IRS has taken more people to tax court since then and the general thinking has shifted in this arena.

The IRS looks at *intent* and, to a certain degree, business model.  The IRS no longer considers frequency of an activity when considering whether or not self employment tax applies.

Flipping, in the VAST MAJORITY  of all circumstances, will be subject to Self Employment Tax.  SO you would pay SE tax on your flipping income and, even thought it is infrequent, on any sales commissions you might make as an agent as well (after legitimate business expenses are deducted).

Which then brings up the Home Office.  The Home Office must PRIMARILY be used for the related business purpose.  If this is where you research your next flip, do all the accounting for the flip and then work to sell it AND YOU DO PRETTY MUCH NOTHING ELSE IN THE ROOM, then you would be able to deduct the home office.

If, however, you also use that room to research stock purchases, play video games, work on hobbies, watch movies or generally mess around with every other activity in your life, then this would not qualify for the home office deduction.

Rev. Ru. 58-112 is still listed as good authority, and the Government is typically always bound by its own Revenue Rulings.

@Christopher Smith

@Linda Weygant

@Patrick Liska 

Thanks for the feedback, you guys.  Very helpful and informative discussion.  Also, I really enjoyed your podcast, Linda!