Real Estate Professional vs. Non Professional (Taxes)

[Jess White]

What’s the difference when it comes to taxes?

What can you write off as a “Professional” that you can’t as a Non Professional. I’m referring to the IRS terms for investors and the differentiations.

[Natalie Kolodij]

As Lance mentioned the difference is related to losses. 

Normally you can't use losses from passive income to offset active income. (your w2 income for example). 

There's a small taxpayer exclusion where you can take up to $25k in losses but that phases out at $100k and goes away completely at $150k. 

So if you're married and making $160k a year.....and your rentals generate $5k in losses. You don't get any benefit from those. They just roll forward until a year when you have active income to use them against. 

If you're a real estate professional both spouses get the benefit. So if one of you keeps your w2 job making $150k a year and the other managers your rental portfolio and meets the tests to  qualify as RE pro..and those rentals generate $20k in losses each year....you get to reduce your w2 income by that $20k loss. 

So that's the major benefit.