benefits of real estate professional .

10 Replies

I would like to know the tax benefits of the RE Professional . Me and my husband both work full time. We are upto 19 units and flipped 2 houses so far. We do have property management in place for our 12 -plex and 4-plex. Others we manage ourselves. What do we need to do to qualify for a RE professional and what are the tax benefits if we do? Please share the info on this. 🙏 thanks 🙏

@Deepika Tandon

RE pro becomes helpful if you have a loss from your RE investments/Business. If you dont expect a loss, it does not matter. 

It is possible to qualify for RE pro even with the full-time job, but have to be carefully planned. People have done it. 

Without RE pro status, If your AGI is below 100k, you can deduct 25k in a loss and the deduction phased out and is completely gone after 150k. I am guessing with two W-2 income you guys are over the 150k AGI, which means you cannot deduct any Rental losses unless you qualify as RE pro. If you do have the loss, you can deduct the entire loss against your W-2 income if you are RE pro. 

Qualifying for RE pro has its own complicated rules.  First lets see if you actually have a loss. 

Originally posted by @Deepika Tandon :
I would like to know the tax benefits of the RE Professional . Me and my husband both work full time. We are upto 19 units and flipped 2 houses so far. We do have property management in place for our 12 -plex and 4-plex. Others we manage ourselves. What do we need to do to qualify for a RE professional and what are the tax benefits if we do? Please share the info on this. 🙏 thanks 🙏

@Ashish Acharya provided an excellent answer. I will just add the bird's view.

1. The benefit if REPro is being able to deduct losses from operating a rental portfolio - IF such losses do exist and if they are limited by tax law.

2. As a rule of thumb, if you have mortgages - you probably do have losses. Easy to check by looking at your Schedule E (if you file your properties on your personal tax return) or Form 8825 (if you file as a partnership) 

3. And if your combined W2 income is over $150k - those rental losses are "frozen", unless you qualify as REPro. 

4. If you both have regular 40-hr jobs - you cannot qualify as REPro, sorry. If one of you have a part-time job - then maybe.

Thanks for great information. My husband has a W2 job bit I do have a catering business. How do I qualify to be a RE Pro? Someone at a meet up we’re saying it would be 700 hrs for each property. My understanding was 700 hrs all together. Or 700 hrs of both is us combined. He did lots of paintings and repairs as units became vacant this year. What activities are qualified? Please share your knowledge. Thanks
Originally posted by @Deepika Tandon :
Thanks for great information. My husband has a W2 job bit I do have a catering business. How do I qualify to be a RE Pro? Someone at a meet up we’re saying it would be 700 hrs for each property. My understanding was 700 hrs all together. Or 700 hrs of both is us combined. He did lots of paintings and repairs as units became vacant this year. What activities are qualified? Please share your knowledge. Thanks

It may be possible for you to qualify, but we cannot make this call thru an online discussion. This is something for an in-depth consultation with a tax professional.

Some pointers - but there is more than these, it's only a start.

1. You would need to spend more time in real estate than in your catering business.

2. That time has to be documented with a detailed ongoing time log.

3. It has to be time of actual work. For example, time you spent reading discussions on BiggerPockets may not qualify.

4. It has to be  your time, not your husband's.

5. It has to be over 750 hours per year, combined for all properties.

Again, there's more to it. Don't skip a tax professional's help on this one. RE Pro claims are very regularly audited by the IRS.

Thanks for the info @Michael Plaks my husband and I have a few rental properties here in SoCal and other states. We both have full time job. For 2018, we are expecting a loss since we recently acquired another house to be our primary and the house we are in will be a rental property. I am planning to repaint the interior and exterior, replace the whole central AC unit, replace doors etc.. I was saddened by the fact that we are not able to deduct these expenses as a loss to help offset our high tax withholdings. However, I do have a small hope of qualifying as a REPro because of my type of job. I am a full time registered nurse but I work 3/nights a week only. Therefor, I am confident that it shouldn't be hard to prove that the remaining 4 days of the week I am working on RE activities, and I'm absolutely sure that I have spent more than 700 hrs of RE related activities this year. I do go to RE meetings as well, although not regularly. I drive to San diego from LA to check out RE at some point. 

Now the tricky part is, we recently hired a PM for our local rental properties, but I do the showing myself and have a weekly meeting with my PM about our listings and I still approve tenants myself.

I will most definitely sit down with a cpa regarding this matter but I just want to know what are your, or anyone's thoughts on this.

Best regards,

Alicia

@Deepika Tandon One of you may need to go part time in you W2 to qualify, here is a good article. https://www.biggerpockets.com/renewsblog/2014/09/25/your-complete-guide-to-the-real-estate-professional-tax-loophole/

@Alicia Johnson

The answer is maybe, as you probably expected.

As far as how hard it would be to prove - remember that the IRS requires a detailed time log, created as you go (as opposed to reconstruction during the audit). If you do keep such log - good for you. If not - start ASAP.

The other problem is that not all time you spend qualifies, and the 750 hrs test is "all or nothing": if the IRS can strike a few hours to bring it 749 hours - you lost. For example, it is debatable whether your time spent driving to San Diego qualifies. If your 750 hrs hinges on that driving, it's risky.

Yes, do sit down with a CPA, but only if he is well familiar with RE Pro status and not from reading some blog.

Thanks for posting this @Alicia Johnson - my husband and I are working towards the same thing for me. He's a full time W2 worker and I'm a stay at home mom. Right now I manage 15 of our rental properties and about 6 others for some family members. We've had a really hard time getting our accountant to get back to us on questions (arg- probably need to switch to someone in Oklahoma City with better knowledge on real estate tax code) because I'm definitely wanting more clarification on logging hours and what applies. Ex. does time spent on BP apply?? @Michael Plaks do you know of any resources for further clarification? 

@Jenny Adel

With the size of your portfolio plus additional PM duties, you should be able to qualify.

Unfortunately, there is no defined list of what time does or does not qualify. For example, there were court cases that allowed driving time to and from the properties, and other court cases that did not. 

Time spent on BP most likely does not count. I would still log it, but I would not count on it if you need these hours to clear the 750 hours threshold. Only use them as a buffer but prepare to concede them if the IRS objects.

Again, you probably can find 15 hours a week of "cleaner" activities. Start a policy of inspecting every property twice a month. That alone should make the necessary hours and would be easily justified. Plus interviewing tenants, working with repairmen etc.

Last thing - no real need for a local tax accountant these days of technology. Real estate experts are not that easy to find. Most of us work nationwide, remotely.