Classifying Spouse as Real Estate Professional

16 Replies

I am curious if classifying my spouse as a real estate professional can offset ordinary income when filing jointly. She does actually classify as such. We have rental properties in various LLC's and until recently were under the impression that the deductions we could claim against my W2 income was limited to her percentage interest in the LLC's (i.e. since we are 50/50 members in the LLC that only 50% (her share) of passive losses can be deducted against my ordinary income. Can anybody help clear this up for me? Thanks in advance.

Gwyeth

@Gwyeth Smith - obviously ask your cpa. if your spouse is a real estate professional, you can deduct 100% of your jointly owned investing passive losses as “active”. So if I “lose” money investing after depreciation, expenses, mileage, then we get a tax refund because it offsets my husband’s salary. It doesn’t matter if I have positive cash flow from my investments (or not), as long as the revenue - expenses - depreciation is negative, it’s a tax saver. If revenue - expenses - depreciation is positive, you owe taxes on your RE investments.

You are filing jointly, so only one spouse needs to qualify as a real estate professional to offset income from income sources such as your W-2. Be careful; the rules for qualifying for a real estate professional are extremely complex - it is an area of the tax code that many practitioners and even judges (tax court cases) have gotten wrong. Consult with your CPA. 

@Gwyeth Smith
This is the only benefit of having spouse, for tax deduction. Just kidding. 

If she is RE professional, and you file a joint return, you can offset total ordinary income with all the loss from the joint return. 

The use of the plural in Reg § 1.469-9(c)(4) indicates that both spouses on a joint return are considered qualifying taxpayers if one spouse separately satisfies both requirements of RE pro. 

It should be noted that qualifying as a real estate professional doesn't guarantee rental real estate income will offset other net taxable income.

It just allows a taxpayer to apply the material participation rules to rental real estate for a non-passive/passive determination.

Consult your tax CPA/EA.

@Natalie Schanne do you include potential tax savings when calculating ROI on a prospective property? I'm a bit further up the tax brackets and the tax savings could be substantial when buying more expensive properties thanks to the larger depreciation expense. TIA for your thoughts.

@Lance Lvovsky thanks for all this advice. Looking at same in future for my wife. She’s a FT mom who may go back to work PT so was thinking that if she was more active in searching for deals, managing PMs, bookkeeping...that could easily be 750 hours/year (14.5 hours/week). Is it that simple? Does she then qualify as a RE professional?

Originally posted by @David C. :

@Lance Lvovsky thanks for all this advice. Looking at same in future for my wife. She’s a FT mom who may go back to work PT so was thinking that if she was more active in searching for deals, managing PMs, bookkeeping...that could easily be 750 hours/year (14.5 hours/week). Is it that simple? Does she then qualify as a RE professional?

 As long as you can log more than the applicable 750 hour and  spends more time in real estate than in anything else you should be good.

@Steven Hamilton II Thanks Steven. I've been reading a fair bit on it since we spoke but couldn't quite figure out what would count as 'spending time in REI'. She'll be a partner and manager in the LLCs and could take on more of the searching, analyzing, PM managing as the portfolio builds. But good to know the "...more time than anything else" part - so we'll need to restrict part-time nursing work to 14 hours/week. thanks - chat soon

Originally posted by @David C. :

@Steven Hamilton II Thanks Steven. I've been reading a fair bit on it since we spoke but couldn't quite figure out what would count as 'spending time in REI'. She'll be a partner and manager in the LLCs and could take on more of the searching, analyzing, PM managing as the portfolio builds. But good to know the "...more time than anything else" part - so we'll need to restrict part-time nursing work to 14 hours/week. thanks - chat soon

 I have a checklist that helps track that I sent to clients. I'll see if I can get a copy out. 

Thank you all for the responses so far. What are your thoughts on what seems reasonable in terms of number of units to keep a spouse active and busy enough to make up 750 hours a year?

Important to consider as I plan ahead - e.g. buy more turnkeys SFHs that will need her to manage the managers? or diversify into syndications that will be really passive and not involve her at all in active way?

Will the IRS believe that she can be busy with 3,5,7,10 doors?

Might it help if she manages and we don't have PMs for some of the houses?

Don't want to make Spouse as Real Estate Pro my guiding force in investment decisions but definitely something to consider, right?

@Steven Hamilton II

hi Steven,

Is this related to same topic or a seperate tax law to the 750 hour Real Estate Professional benefit (in my case something to consider for spouse in future) tnk you.

https://www.claconnect.com/resources/articles/2019/irs-safe-harbor-on-section-199a-impacts-tax-filing-for-rental-real-estate

@David C.

Before proceeding with any of your ideas, consult a marriage counselor. And I'm only half kidding because keeping your wife happy is priceless, while all tax savings have a price tag.

Letting the tax tail wag your entire life is a slippery slope. Like artificially restricting your wife's nursing work for a tax deduction? C'mon man. Don't forget that RE Pro doesn't create new deductions, it merely allows you to take them sooner.

My point is: RE Pro, if you qualify, is good, but it cannot be the primary goal. Lifestyle and health first, business second, taxes third.

As to the article you found - the Sec. 199A QBI deduction has nothing to do with RE Pro. Completely different issues. The former is for rental operations with net profit, while the latter is for portfolios with net losses.

@Michael Plaks

good advice. Thank you. Would never discourage my wife from pursuing her goals and dreams, and hold her back from what she’s passionate about, when she resurfaces to think about herself again after a year of motherhood. Nursing is not that for her though, for many reasons. So just weighing up options that work for her, and all of our family, both financially and for wellbeing. Knowing the tax law helps to think broader and get more creative. Whatever we decide will be win win.

Originally posted by @David C. :

@Steven Hamilton II

hi Steven,

Is this related to same topic or a seperate tax law to the 750 hour Real Estate Professional benefit (in my case something to consider for spouse in future) tnk you.

https://www.claconnect.com/resources/articles/2019/irs-safe-harbor-on-section-199a-impacts-tax-filing-for-rental-real-estate



Completely different provisions. This one you can ignore as I do not find it to be applicable to most cases. Most rentals will qualify as a business activity.