Rental income taxes: Is it better to be under a active agent?

5 Replies

Hello,

My wife and I purchased our first property (Duplex), we have a PM company looking over it for us being that it is about 600 miles away. We are located in Washington state.

I've searched around for a bit maybe I'm asking the wrong questions in search...

When it comes to tax time is it better to claim as a "active RE agent" or not? I'm an active agent however my wife is not.. Any advice or pointers would be GREAT!

Thanks!

Originally posted by @Levi McDaniel :

Hello,

My wife and I purchased our first property (Duplex), we have a PM company looking over it for us being that it is about 600 miles away. We are located in Washington state.

I've searched around for a bit maybe I'm asking the wrong questions in search...

When it comes to tax time is it better to claim as a "active RE agent" or not? I'm an active agent however my wife is not.. Any advice or pointers would be GREAT!

Thanks!

 Only 1 of you needs to be an agent.  However, there are clarifying questions for each property that you have to answer in order to qualify it as a passive RE investment as a Realtor.  I would check with your accountant or tax person, but I think if you have a PM, it would negate you from qualifying the properties for that classification because THEY are doing the work, and not you.

You are probably referring to real estate professional or not. If you’re a RE pro for tax purposes it means you’re active. You must spend 750 hours a year Doing real estate and not something else.

Consult a cpa no tax advice given

Hi Levi,

I am guessing you mean "real estate professional".  Currently, the major tax advantage to that status is that your real estate losses are not capped as they would be for other investors.

The definition of a real estate professional, for tax purposes, is defined by the Internal Revenue Code.  It does not mean that you have to be an agent or broker, etc.

However, given the tax bill working its way through Congress it is possible that status may become a disadvantage.  While you will still have uncapped losses, under the House version of the tax bill "passive" investors would be taxed at a 25% rate on all business and rental income.  Active businesses (which real estate professionals fall into, at least based on my understanding) would have 30% of their business income taxed at a 25% rate (under the safe harbor) and the remaining 70% will be taxed at the ordinary income rate.

Thank you everyone, Yes that's exactly what I was asking. Good to know about the " Professional" definition. I have my license but mainly use it to look at the back end of deals, I spend most of my time working as a mechanic for my company.

I will try to find a local CPA who can sit with us and knows more about the REI.

@Levi McDaniel

Based upon your most recent comment, you will not be able to qualify as a real estate professional.  However, with only one rental property, I wonder why you are asking the question.  What tax issue are you trying to address that prompted this question?

Since you have a professional property manager, I am wondering if your question was really prompted by the IRS active participation criteria for using the residential rental activity net passive loss allowance.  That is a completely different question that would get a totally different answer.

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