Real Estate Professional Status - Partnership LLC

5 Replies

Hello BP,

I would like to hear a second opinion here regarding Real Estate Professional Status (REPS).

Background: I have a full time W2 job. My wife does not work. My wife and I formed a partnership LLC back in 2019 to hold our rentals. I have learned about real estate professional status from reading lots of books and listening to podcasts. So in 2020, we made sure that my wife will meet all the requirements to elect REPS for our 2020 Tax Return. She does all the bookkeeping and accounting. She has been managing our 6 rentals and 2 renovations projects and tracking her date/time/description performed for each task. From my understanding about REPS, all losses from our rentals should be able to offset my W2 income. For personal return, we will be filing jointly.

Response from our CPA regarding REPS: When our CPA finished the 2020 Return, they sent it to me for my review. I still see Losses Carryovers to 2021.  

  • So I asked them, Since we elected RE Professional Status, shouldn’t we have no losses carryover? 
  • Their response was; Technically, only one of you is a RE professional - since your LLC is a partnership the loss is split between both. Since only one of you is an RE professional, the other must still abide by the regular rules.

What do you guys think about their response? Please let me know if I’m missing anything.

I appreciate all the inputs.

Thank you!

Originally posted by @Maris Sacornvasi :

Hello BP,

I would like to hear a second opinion here regarding Real Estate Professional Status (REPS).

Background: I have a full time W2 job. My wife does not work. My wife and I formed a partnership LLC back in 2019 to hold our rentals. I have learned about real estate professional status from reading lots of books and listening to podcasts. So in 2020, we made sure that my wife will meet all the requirements to elect REPS for our 2020 Tax Return. She does all the bookkeeping and accounting. She has been managing our 6 rentals and 2 renovations projects and tracking her date/time/description performed for each task. From my understanding about REPS, all losses from our rentals should be able to offset my W2 income. For personal return, we will be filing jointly.

Response from our CPA regarding REPS: When our CPA finished the 2020 Return, they sent it to me for my review. I still see Losses Carryovers to 2021.  

  • So I asked them, Since we elected RE Professional Status, shouldn’t we have no losses carryover? 
  • Their response was; Technically, only one of you is a RE professional - since your LLC is a partnership the loss is split between both. Since only one of you is an RE professional, the other must still abide by the regular rules.

What do you guys think about their response? Please let me know if I’m missing anything.

I appreciate all the inputs.

Thank you!

That is not correct. You might need some elections but the losses should free up.  

To qualify as real estate professionals, hours spent by each spouse on real estate trades or businesses cannot be combined to qualify for eligibility for the 750 and 50% rule. 

However, to determine the material participation rule on the activity, spouse’s participation can count towards material participation. So, if this was structureed correctly, the entire activey should be non-passive. This requires deeper converstaion with a correct tax professional.

    Unless something is getting lost in translation, the statement: 

    Technically, only one of you is a RE professional - since your LLC is a partnership the loss is split between both. Since only one of you is an RE professional, the other must still abide by the regular rules. 

    is not correct. It's a pretty common occurrence that a spouse-spouse owned LLC is formed to hold RRE. If one of the spouses is an RE professional and materially participates in the RRE activities, we'd generally expect to see all of the related RRE loses as non-passive.

    @Maris Sacornvasi

    As others have mentioned, If one spouse is eligible to claim real estate professional status, the losses from real estate activities should be eligible to offset other types of income.

    You may need to elect some 'grouping elections' to take all the losses.

    Whether you should elect the grouping elections is something you need to carefully decide to do as there can be some negative connotations.