Hours to get RE license - do they count towards RE pro status?

Question

I left my job at the end of 2020 to focus full-time on managing our family's current investment properties and building out our RE portfolio in the years to come. As part of this change, I am planning to qualify as a RE professional. I am also considering obtaining my RE license so that I can get earlier access to listings, to potentially save on commissions, etc. If I go that route, would the hours that I spend on the pre-licensing coursework count towards the requisite hours to qualify for RE pro status?

Dan A. · Answer

@David M.

My situation is pretty unique in that we will make a lot more W-2 income in 2021 (due to a bonus that I received in Jan 2021) than we will in future years. So, our plan is to couple the RE pro designation with a cost seg on a 4-unit investment property that we purchased in Nov 2020. Together, we should be able to offset a lot of our 2021 W-2 income that is taxed at a much higher marginal tax rate than any income we will have in future years. So we get to pull forward the tax benefits AND each $ of deduction is more valuable because it offsets a $ of income that would have otherwise been taxed at a higher marginal rate. Hope that makes sense.

Dan A. · Answer

@Michael Plaks

Interesting viewpoint, thanks for sharing. I never thought about it from that perspective but you're correct, the primary objective would be to further my career as a property manager + investor, rather than to start a career as a realtor.

David M. · Answer

@Dan A.

Oh sure...  So, you basically only need to claim the status for just this tax year?    Hmmm...  Just a 'wacky' suggestion...  Get the license, hang it with a broker, and do some real estate agent work for the year.  Learn the ropes about being a real estate agent.  From that experience, decide from there...

The general consensus on advice here on BP is getting a license to save on commissions can be foolhardy since if you haven't learned the profession, you are basically screwing yourself over.  So, the year to try to learn something about the profession.

Meanwhile, I personally am not worried about an audit.  But, if Uncle Sam came knocking, I think it'd be pretty hard for them to say I'm not doing real estate activities with the various time I spend as an active agent.

Good luck.

Michael Plaks · Answer

@Dan A.

Grey area, in my opinion. The IRS is likely to take a position that your realtor activity has not started until you were licensed, similarly to how being a law student does not count as legal practice hours. The counter-argument is that these hours were part of your ongoing activity as a property manager and not that of an aspiring realtor..

I think this argument has a 50/50 chance, so I would not stake your result on these hours.

David M. · Answer

@Dan A.

Oh, okay.

Like i said, I forget.  Its been mentioned here before on BP.  But, I don't remember.  Its supposed to be hours towards the trade, so getting your license should be.

But, its only good for that first year...  To keep it up what are you doing for the other years..

By the way, you sure its better for your taxes to claim RE pro status?  Its not always...

Good luck.

Dan A. · Answer

@David M.

It's a very fair point. I should be fine either way, but I like that these hours can be very easily documented because it is a prerequisite for the license. So if I can apply the hours (appears to be 45 hours per course * 3 courses = 135 hours) then I think it makes sense for me to take the plunge.

David M. · Answer

@Dan A.

That's a good question...

But, let me ask you:  does it matter?  Are you really going to fall short of the 750 hr by ~80hr (or whatever your required time is)?  If so, I think thats great.  you are basically living a retired life!

if you are doing this full-time, then you shouldn't have any other competing hours for the 50% requirement.

Don't forget the annual costs (~$2k to $3k) for just having your license active.

Good luck.