RE Professional Tax Benefit w/ Spouse W-2 Income

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RE Professional Tax Benefit w/ Spouse W-2 Income

Joyce Talley
Member since 2021 · 2 posts · 1 vote

Hey everyone, hoping to get some insight from this group regarding the RE Professional Tax benefit.

I see lots of articles claiming that I should be able to deduct rental losses against my husband’s W-2 income if I claim the RE Professional Tax status. However, I spoke to a CPA just now and he told us that this is not accurate. He said that I would only be able to deduct against my own income. He also said that I'd only be able to do this with properties that are purely under my name, and if I co-own them with my husband, then I wouldn't be able to even deduct them against my own active income.

Can anyone confirm this info? Here’s a snippet from a Bigger Pockets article I found showing that I should be able to deduct against my husband’s income:

"Here’s another great thing about real estate professional benefits: As soon as one of the couple meets the qualifications, both receive the benefits. Jamie’s rental losses can offset Darin’s medical income—even if Darin himself is not a real estate professional." Link to article here.

Any help here would be greatly appreciated!

Joyce

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Ashish AcharyaBusiness Member
CPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes
5y
Originally posted by @Joyce Talley:

Hey everyone, hoping to get some insight from this group regarding the RE Professional Tax benefit.

I see lots of articles claiming that I should be able to deduct rental losses against my husband’s W-2 income if I claim the RE Professional Tax status. However, I spoke to a CPA just now and he told us that this is not accurate. He said that I would only be able to deduct against my own income. He also said that I'd only be able to do this with properties that are purely under my name, and if I co-own them with my husband, then I wouldn't be able to even deduct them against my own active income.

Can anyone confirm this info? Here’s a snippet from a Bigger Pockets article I found showing that I should be able to deduct against my husband’s income:

"Here’s another great thing about real estate professional benefits: As soon as one of the couple meets the qualifications, both receive the benefits. Jamie’s rental losses can offset Darin’s medical income—even if Darin himself is not a real estate professional." Link to article here.

Any help here would be greatly appreciated!

Joyce

 You should be able to deduct losses against your active income in your joint tax return. 

Once at least one spouse qualifies as a real estate professional, the couple's rental real property activities are no longer per se passive and the activities are examined for material participation using the collective participation of both spouses.

Example.

Bob and Sally Smith are both lawyers, each owning a one-half interest in the Smith Law Firm where they both work approximately 800 hours per year. Bob is also a licensed real estate broker, working 600 hours per year helping customers buy and sell property. The couple owns a small residential apartment building that requires 250 hours per year of work. If Bob and Sally decide to split the time working in the rental activity, each working 125 hours, neither one would be considered a real estate professional and any losses incurred would be per se passive. Even if Bob's 125 hours in the rental activity were considered material participation, he would only have 725 hours for the year, meaning his time materially participating in real estate activities would be less than one-half of his personal services and less than 750 hours. 

However, if Bob and Sally agreed that Bob would handle all of the rental activities, he would be considered a real estate professional because more than one-half of his personal services would have been in real property trades or businesses and he would have worked at least 750 hours in real property trades or businesses. The result would be that their rental activity would not be per se passive and, since they materially participated in the rental activity, the couple could deduct the losses against their ordinary income.

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes
    5y
    Originally posted by @Joyce Talley:

    Hey everyone, hoping to get some insight from this group regarding the RE Professional Tax benefit.

    I see lots of articles claiming that I should be able to deduct rental losses against my husband’s W-2 income if I claim the RE Professional Tax status. However, I spoke to a CPA just now and he told us that this is not accurate. He said that I would only be able to deduct against my own income. He also said that I'd only be able to do this with properties that are purely under my name, and if I co-own them with my husband, then I wouldn't be able to even deduct them against my own active income.

    Can anyone confirm this info? Here’s a snippet from a Bigger Pockets article I found showing that I should be able to deduct against my husband’s income:

    "Here’s another great thing about real estate professional benefits: As soon as one of the couple meets the qualifications, both receive the benefits. Jamie’s rental losses can offset Darin’s medical income—even if Darin himself is not a real estate professional." Link to article here.

    Any help here would be greatly appreciated!

    Joyce

     You should be able to deduct losses against your active income in your joint tax return. 

    Once at least one spouse qualifies as a real estate professional, the couple's rental real property activities are no longer per se passive and the activities are examined for material participation using the collective participation of both spouses.

    Example.

    Bob and Sally Smith are both lawyers, each owning a one-half interest in the Smith Law Firm where they both work approximately 800 hours per year. Bob is also a licensed real estate broker, working 600 hours per year helping customers buy and sell property. The couple owns a small residential apartment building that requires 250 hours per year of work. If Bob and Sally decide to split the time working in the rental activity, each working 125 hours, neither one would be considered a real estate professional and any losses incurred would be per se passive. Even if Bob's 125 hours in the rental activity were considered material participation, he would only have 725 hours for the year, meaning his time materially participating in real estate activities would be less than one-half of his personal services and less than 750 hours. 

    However, if Bob and Sally agreed that Bob would handle all of the rental activities, he would be considered a real estate professional because more than one-half of his personal services would have been in real property trades or businesses and he would have worked at least 750 hours in real property trades or businesses. The result would be that their rental activity would not be per se passive and, since they materially participated in the rental activity, the couple could deduct the losses against their ordinary income.

    [email protected]941-914-7779
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  • Brian BoydPro Member
    USA · Member since 2019 · 305 posts · 536 votes
    5y

    @Ashish Acharya is correct. The regulations on this particular tax matter make it clear that you need to participate 750 hours a year. It would be wise to memorialize your activities each year with a time keeping. Moreover, you should find a new CPA. 

    1Reply
  • Chris Levarek
    Real Estate Syndicator · Phoenix, AZ · Member since 2018 · 903 posts · 1k+ votes
    5y

    @Joyce Talley Find another CPA. My wife qualified as RE professional last year and we did deduct losses from real estate against ordinary income. It can be done. Just look on youtube for the video "REPS 02: How You Can Offset W-2 & Active Business Income by Qualifying as a Real Estate Professional" by Brandon Hall to dive deeper into knowing how it works. They do a great job of explaining the requirements and risks.

    1Reply
  • Joyce Talley
    OP
    Member since 2021 · 2 posts · 1 vote
    5y

    Thanks, everyone. My suspicions were correct and I genuinely appreciate your help! 

    0Reply
  • Jonathan R McLaughlin
    Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
    5y

    @Joyce Talley Be sure of the CPA wasn’t actually answering another question. The grain of truth here is that just becoming a real estate professional does not automatically allow you to take losses against other income. as another poster mentioned you need to materially participate in management of rental properties over 500 hours. If you don’t do that it doesn’t matter how many hours you work or if you qualify as a real estate professional if you still can’t take the reduction but that doesn’t sound like question your CPA was answer. Also you have to explicitly file to join properties together two combined them to make 500 hours and if you don’t it’s 500 hours for each property

    1Reply
  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    5y

    @Joyce Talley

    As others have pointed out, if you pass the tests to claim real estate professional status, you are eligible to offset other types of income on your return(ordinary or portfolio).

    The two tests are spending 750 hours on real estate related activities and to spend more hours on real estate activities than other activities(W-2, another business, etc)

    If you met the test to claim real estate professional status in 2020 and haven't filed your 2020 tax return, you may want to consider working with another accountant for the 2020 tax return.

    Good luck.

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  • Chris Talley
    San Mateo, CA · Member since 2018 · 13 posts · 2 votes
    5y

    @Chris Levarek I just spent the last 5 hours or so watching that youtube channel. Amazing resource, and way better info than we got from our CPA. Thanks for the rec!!

    1Reply
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