How to qualify my wife as a RE professional for tax reasons?

Question

Hi,

I was wondering how and if my wife could qualify as an RE professional for tax purposes? I would love to be able to write-off some of my W-2 income.

She is a stay at home mom with our 1 year old son, and uses her free time to help research properties.

From what I have read, she needs to spend most of her working time in real estate activities and it has to be over 750hrs/yearly. How do we prove this and what additional steps are needed in doing this? Does research even count (like comping properties) or does she need to be more active (have a real estate license, etc.) She is very willing to be more active in real estate actives in order for us to qualify...

I was hoping somebody could shed some light on this for me?

Thanks

Gita Faust · Answer

Can you consider her as an employee?

Here is a link http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-Self-Employed-or-Employee

That way the hours do not come in play.

Jon Holdman · Answer

I don't have it handy but I once found a document on the IRS web site that discussed this topic.  Trying to claim Pro status with a few rentals was specifically discussed.  It mentioned the effort for managing a rental was minimal.  That matches my (limited) experience.  Maybe 20 hours per property per year, less in good years.

OTOH, I've see a guru claim you could count hours watching "Girls Gone Wild" toward this.  His arguments was you would be studying possible tenant behavior.  Seems very dangerous to me.

Mel Selvidge · Answer

I hope your losses aren't too much!  If your situation is such that they are peculiar and there will be rental income next year, you can carry them forward and deduct them then without declaring professional status.

I've been worried I'd see some on paper this year as I bought and rehabbed (hands-on) a vacation rental at a significant distance, so I've got a lot of largely one-time expenses with mileage, per diem, 1/5 of a full house of furnishings, all of the consumable cleaning/maintainance a place needs, etc.  (Which are current and which are capitalized is another question though…)  Even though it looks like a moot point now that I've finally taken care of my bookkeeping, I though a paper loss wasn't out of the question. I've kept really good logs of my time and activities just in case.  I'm also hoping to get another property before the end of the year that won't have much time to bring in any income but will need the same outfitting.

Going through this with the tax advisor last week, he strongly urged me to consider just carrying the losses forward, if I even had any, since they would be small compared to the cost of an audit and a one-time artifact of the startup processes.  Basically if I have losses they'll come off of my investment income next year instead of my husband's income this year.  He said that by checking the "pro" box with only a property or two, no matter how much work it actually was to rehab it, I was a sitting duck.

I have mixed feelings about skipping legitimate deductions to avoid audit though.

disclaimer…noobie, not a cpa, just passing on what I've learned asking the same questions.

Jon Holdman · Answer

A couple of points.

1) Good rentals don't produce passive losses, even with depreciation.  They produce income.  If your rentals are producing passive losses I'd focus on finding better deals.

2) Depreciation is more of a loan than a deduction.  Depreciation decreases your basis and so increases your gain when you sell.  And you pay the recapture tax on the amount of gain up to the depreciation taken (or allowed, if that's more.)  If you can't take the passive losses as you go they can be carried forward and used to reduce the gain when you sell.

Tom S. · Answer

@Mike H.

I believe the $25k deduction starts to get capped once you make $100k per year, and is fully phased out once you make $150k.  In other words, at that point the $25k deduction cannot be taken.  However, if a spouse does qualify for the RE professional designation, those income limits no longer apply, and the $25k deduction limit no longer applies either.

- Tom

Mike H. · Answer

Just to clarify since your post said "Some" of your income.

Even if you are not a real estate professional, you can still write off up to 25kin real estate losses against your regular earned income (i.e income from your full time job).

Is your accountant saying that you can't write off any real estate losses against your earned income unless you're a real estate professional?  Obviously, everyone has their own situation, but my understanding was you can deduct up to 25k of your losses every year. I am doing that on my taxes.So if you're just trying to deduct "some" of your losses, you should be able to.If, on the other hand you are trying to deduct more than 25k in losses per year, then you would need to have the real estate professional designation according to the IRS rules. And, here's the thing, its supposedly a big red flag for them to audit.I would be very hesitant to stretch anything on that item. I'm a firm believer in not doing anything on my taxes that is a red flag. I purposefully do not deduct mileage at all on my taxes even though I know that I'm entitled to. I just don't want to do the logs and don't want to create any red flags. Disclaimer. I am not an attorney/cpa and suggest you check with one/both before doing anything.

Cal C. · Answer

That is a very difficult question to answer, but here is a good article on it.

http://www.journalofaccountancy.com/Issues/2013/De...Journal of Accountancy article on RE Professional

I'd say it is very important to keep a log.