W-2 income is more then 150k. How to qualify as RE professional?

15 Replies

My husband's W-2 income is projected to be more then 150k. I've heard that it's not possible to take passive loss in that case. I am not employed currently and heard I can qualify as RE professional if certain amount of time is spent working in that area. How would I qualify without getting license. I heard I have to keep a journal or something to keep track of my RE activities, but don't really know any rules or the proper way to do it. We self manage. If anybod does that , please share your knowledge.

Thank you

@Lana Lee

You can only take passive losses against passive gains.  You cannot offset them against regular income.

You need to spend at least 500 hours/year involved in real estate to qualify as a real estate professional.  Then your income is taxed at regular income rates.  However, I do not know if you can offset your husband's income with losses from your business.  You really need to check with a CPA, which I am not.  

Talk to your local CPA but unless you're doing this business full time I doubt you'd qualify. You should verify sources and I don't know if this article is completely accurate but heres some of the bullet points, http://dennisassociates.com/2017/06/14/how-to-qualify-as-a-real-estate-professional/

@Lana Lee You really want to talk to your CPA, if you get audited that's the person who is going to have to work with you. That said, you might want to look at how "reasonable" it is to look at the work related to managing your properties. If you self manage a single SFR that you try to make the argument that you're spending 500+, 700+, etc. hours a year on it, that probably won't fly. It just wouldn't satisfy any reasonable "smell test". Now if you have 50 units that you self-manage, well, that's a different story. Then again, if you were managing 50 units your CPA would have probably already told you to create a log, etc. to become designated as a "real estate professional". Again...all guesses from me...I'm no CPA...consult a CPA there in Philly...

#FlyEaglesFly

Originally posted by @Jonathan Twombly :

@Lana Lee

You can only take passive losses against passive gains.  You cannot offset them against regular income.

You need to spend at least 500 hours/year involved in real estate to qualify as a real estate professional.  Then your income is taxed at regular income rates.  However, I do not know if you can offset your husband's income with losses from your business.  You really need to check with a CPA, which I am not.  

 Last year when we did taxes our accountant deducted our rental duplex depreciation and all the maintenance expanses from my husband's gross w-2 income. 

Originally posted by @Jeremy Kloter :

Talk to your local CPA but unless you're doing this business full time I doubt you'd qualify. You should verify sources and I don't know if this article is completely accurate but heres some of the bullet points, http://dennisassociates.com/2017/06/14/how-to-qualify-as-a-real-estate-professional/

 Thank you for the article !!!

Originally posted by @Andrew Johnson :

@Lana Lee You really want to talk to your CPA, if you get audited that's the person who is going to have to work with you. That said, you might want to look at how "reasonable" it is to look at the work related to managing your properties. If you self manage a single SFR that you try to make the argument that you're spending 500+, 700+, etc. hours a year on it, that probably won't fly. It just wouldn't satisfy any reasonable "smell test". Now if you have 50 units that you self-manage, well, that's a different story. Then again, if you were managing 50 units your CPA would have probably already told you to create a log, etc. to become designated as a "real estate professional". Again...all guesses from me...I'm no CPA...consult a CPA there in Philly...

#FlyEaglesFly

 Thank you. I got your point. We currently have 2 duplexes and I guess it's not enough to qualify as RE professional , although I spent quite a few hours advertising, doing showings, phone and in person interviews, screening, analysing applications, creating lease contracts, billing some utilities, documenting maintenance requests, typing up and serving some papers to the tenants when needed, communicating with lawers, even doing some physical labor  ( although my husband does most of that) and other stuff.

Originally posted by @Andrew Johnson :

@Lana Lee You really want to talk to your CPA, if you get audited that's the person who is going to have to work with you. That said, you might want to look at how "reasonable" it is to look at the work related to managing your properties. If you self manage a single SFR that you try to make the argument that you're spending 500+, 700+, etc. hours a year on it, that probably won't fly. It just wouldn't satisfy any reasonable "smell test". Now if you have 50 units that you self-manage, well, that's a different story. Then again, if you were managing 50 units your CPA would have probably already told you to create a log, etc. to become designated as a "real estate professional". Again...all guesses from me...I'm no CPA...consult a CPA there in Philly...

#FlyEaglesFly

 And BTW, our whole city is on the egde with tomorrow's game. You can almost see the Eagles' spirit flying in the air. I can only imagine the pressure on the team. 

@Lana Lee Another way to look at it may be your cash-flow.  If you're getting the $100/month per unit that some people on the site use as a target that's $400/month or $4,800 per year.  It's hard to argue that 500 hours to "optimize" $4,800 per year makes sense.  But maybe if you owned them free and clear and it's $700/unit per month (just making up numbers if you're in a nice part of Philly) which is ~$34K per year it might "smell" a little different to an auditor.  Either way I think it would be tough at 4 units but I'd ask your CPA.  You never know what ideas they might be able to come up with.  

Originally posted by @Jonathan Twombly :

@Lana Lee

You can only take passive losses against passive gains.  You cannot offset them against regular income.

You need to spend at least 500 hours/year involved in real estate to qualify as a real estate professional.  Then your income is taxed at regular income rates.  However, I do not know if you can offset your husband's income with losses from your business.  You really need to check with a CPA, which I am not.  

 We are so new and probably misunderstood this whole deduction thing. I was under the impression that it was dedicated from Gross modified income and nit just passive income.

Hi Lana, hopefully filing tax jointly would allow you to do what you want if you can proof the hours you put into your real estate business. Check with your CPA as others said.

But what you can definitely start doing now is to keep all your activity history tracked. For example you can keep track of your schedule as calendar events, keep emails organized and should be coming from your name, perhaps when you talk RE with your spouse, you can take note of the topics as well, ideally make this more formal like you run a business and you’ll have a much easier time seeing if you can justify the hours need to claim RE professional status.

@Lana Lee

Hi Lana, you can find IRS publication 925 here https://www.irs.gov/pub/irs-pdf/p925.pdf

that explains who can qualify as a RE professional (page 6 of the publication). Acording to this publication you should have 750 hours, not 500 as previously mentioned in the thread. 

Talk to your accountants they should be able to lead you. If you own your properties in LLC and have loses last year that will go to your K-1 and should be deducted from your other income

Originally posted by @Chatree C. :

Hi Lana, hopefully filing tax jointly would allow you to do what you want if you can proof the hours you put into your real estate business. Check with your CPA as others said.

But what you can definitely start doing now is to keep all your activity history tracked. For example you can keep track of your schedule as calendar events, keep emails organized and should be coming from your name, perhaps when you talk RE with your spouse, you can take note of the topics as well, ideally make this more formal like you run a business and you’ll have a much easier time seeing if you can justify the hours need to claim RE professional status.

 Keeping a log sounds like a real job to me, LOL. 

Originally posted by @Yuriy Skripnichenko :

@Lana Lee

Hi Lana, you can find IRS publication 925 here https://www.irs.gov/pub/irs-pdf/p925.pdf

that explains who can qualify as a RE professional (page 6 of the publication). Acording to this publication you should have 750 hours, not 500 as previously mentioned in the thread. 

Talk to your accountants they should be able to lead you. If you own your properties in LLC and have loses last year that will go to your K-1 and should be deducted from your other income

We don't own an LLC. But what is K-1 anyway? Still got so much to learn.

@Lana Lee I understand why you are inquiring about being a RE Professional. There are negative consequences for assuming this classification that you should research before you ever did this in the future.

Originally posted by @John Underwood :

@Lana Lee I understand why you are inquiring about being a RE Professional. There are negative consequences for assuming this classification that you should research before you ever did this in the future.

 I wonder if looking for deals, going to see potential properties, negotiating with the seller also counts?

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