Setting up a management company to qualify for Real Estate Professional designation

2 Replies

Hello all,

I personally have 6 single family rentals and one tri-plex.  I now manage all properties myself with the exception of one.  A year ago, my credit was tight, so I bought 3 properties with my brother.  We own them 50/50, but the loan, title and everything are in my brothers name.  We have an agreement that I receive 50% of the cash flow and get 50% of the equity upon sale.  He put up 3/4 of the down payment/rehab/etc. and I located/oversaw the rehab/and now manage these properties.  I do not get paid anything monthly for the management - that is where my 1/4 down payment benefit kicked in.  I would like to get qualified for a real estate professional tax designation so we could offset some of my husband's income.  I only work part-time, so I can meet the 750 hour requirement and 500 hour active participation requirements.  My accountant said that I cannot count the management of my brother's properties as hours. 

What if I set up a property management entity where the rent from our personal properties and my brother's properties were paid into?  Once the money was received, the entity would retain a 10% fee and disburse the funds to the appropriate bank accounts that the rental properties are held in?  Would I be able to count the management of my brother's properties then?

I am not doing this for asset protection or any other reason - just as a way to demonstrate that I manage properties in addition to our own and to count those hours of activity.  Any thoughts???

It seems to me, the easiest thing to do would be to get your brother to add you to the titles. Now that he owns them, can't he just add you to the title?

As far as setting up a PMC, check on the license requirements to become a property manager in your state.  In CA, you would need a real estate agent license, and maybe even a broker's license.  I forget.  I did not need a license because I was a resident manager.  If I was to manage any of the other properties that I did not live at, I would have had to get licensed.  Google the real estate board website for your state for the rules.

I think your idea of funneling funds that are not actually wages into a PMC, would probably get you into hot water, though.  Sounds like fraud to me, because you'd be trying to make it look like wages, when it isn't.  And you couldn't really claim ignorance after the fact (though ignorance of a law isn't a defense, but sometimes a judge will go easier on you), since you asked your accountant about those hours, and she said they can't be counted.

I really think you just need to get your name on the titles.  Then you're working on your own properties.  I'm no expert, but generally, if something smells fishy - it is.

Thank you Sue.  I didn't consider the legal requirements to be a property manager.