W2 -- 1099 : Real Estate Professional - Tax Status - Does it make sense?

Question

Good Morning!

I currently work in Land Development as a W2 employee making $200k+ a year. I had spoken with my previous CPA about possibly becoming a 1099 for my current employer to achieve Real Estate Professional status. Even though my primary income is in Land Development, becoming a 1099 for this company, does that give me Real Estate Professional status to where I can offset my passive income from my rental properties?

1099 Pros

- I'll be given more money- I have more tax strategies available to me (S-Corp)- I may be able to qualify as a Real Estate Professional (rental property write offs / deductions etc?)

1099 Cons

- More of a headache to manage

Is anyone aware if what my CPA said is accurate?

Thank you!Benjamin

Jeff Nash · Answer

One thing I didn't see you mention is your overall benefits being eliminated or curtailed (i.e- health insurance).  Depending on your age and family situation that can be significant.

The decision to be considered an employee or independent contractor normally falls on the employer and their analysis of what level of control they exert on how you conduct yourself and if they are providing the resources to do your job or not.  So I am curious about that issue.

From a tax advisor standpoint there is a lot more that can be done when you are 1099 but it depends on the client's goals, current financial situation, etc.  As far as REPs go, that is beneficial if you first qualify based on the rules and if you have a portfolio that you can take advantage of to generate losses (using strategies) to offset your income.

Ashish Acharya · Answer

No, the REPS is not automatic. In the end, it is the same hour requirements. If hours are not decreased at 1099 gig, you have the same issue.

Yes, you have more tax-saving opportunities with S-corp vs W2.

Ray Hage · Answer

As a 1099 myself, I can tell you there are a ton of write-offs which is great but you need to meet guidelines of being a REP, not just in name. You don't want to get yourself in trouble with the tax man. Your CPA should be able to guide you in this and you'll want to document your time carefully.

John Malone · Answer

@Benjamin Sol Ignacio not a REP automatically given the 5% rule to start as a likely hurdle.

1099s offer flexibility and most tax advisors can run a scenario out pretty efficiently to help you see the differences.

Lane Kawaoka · Answer

@Benjamin Sol Ignacio

Regarding your question about the 1099 thing, it still falls under ordinary income, but it opens up opportunities to write off various business expenses like home office and office supplies.

As a land development employee, you may not have the same LIBERAL client interactions as a real estate agents would, so things like travel and entertainment expenses might not apply. However, I've noticed that some investors, like doctors, set up their home office and can then write off their mileage as they're technically traveling to their place of business as independent contractors.

On top of that, you can layer some tax strategies from an S-corp, utilizing a salary dividend split to shelter the dividend side and save on self-employment taxes. Work with your CPA to figure out a reasonable salary dividend split, but make sure it's not just a token dollar amount cause that is ridiculous and a red flag.

However, it's worth noting that the 1099 thing isn't directly related to real estate professional status. Real estate professional status requires active participation in your real estate portfolio, and it's a separate topic. I've shared more detailed forum posts on that if you're interested.

Sometimes, you have to be cautious about what CPAs advise since they may find 1099s more cumbersome to manage lol. For you, it might not be a big deal. Personally, I'm a bigger fan of getting passive activity losses from syndications and private placements to shift income from ordinary to passive. It can have a significant impact on your tax bottom line compared to surface-level strategies like what we are talking about here. 1099 or S-corps.

However, when you're still building your net worth and are under a few million dollars, you have to be resourceful and make every inch count. So, exploring these strategies can still be worthwhile.

W2 --> 1099 : Real Estate Professional - Tax Status - Does it make sense?

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