All Forum Posts by: Jason Malabute

To qualify as a Real Estate Professional (REPS), you must meet three criteria: the 50% rule, meaning more than half of your total work hours must be in real estate activities; the 750-hour rule, which requires you to work at least 750 hours in real estate; and material participation in your properties. Since your involvement is primarily as a passive investor in syndications, you’ll need to evaluate if you meet these requirements, as REPS generally favors those who actively manage their properties. Qualifying as a Real Estate Professional (REPS) is assessed annually. Meeting the requirements one year doesn’t guarantee qualification in future years, especially if your level of involvement changes. 

As a general partner on two syndication deals, I’d recommend reaching out to your main sponsor to understand how depreciation is allocated between general partners and limited partners for that particular deal. If there is preferred equity in the deal, it can also affect how depreciation is divided among investors. 

Depreciation recapture is triggered when a property is sold, requiring the investor to pay taxes on the portion of gain attributed to previously claimed depreciation deductions.

Hi Elizabeth,

Using a self-directed IRA to invest in real estate can indeed be a viable option, but there are several important considerations to keep in mind.

 As you’ve noted, any loan used by your solo 401(k) must be non-recourse, meaning you can’t personally guarantee it. This can limit your financing options and potentially lead to higher interest rates.

Be cautious about prohibited transactions and disqualified persons, as outlined by IRS rules. For example, you cannot purchase property directly from yourself or a close family member, and you or any disqualified persons (such as family members) cannot use the property personally. Violating these rules can lead to severe IRS penalties, including disqualification of the tax-advantaged status of your retirement account.

Each self-directed retirement account must have sufficient funds to cover all property-related expenses, as you cannot personally pay these expenses. If you’re considering holding multiple properties, managing cash flow within the account to cover these expenses is crucial.

If you convert a Traditional IRA to a Roth IRA, be aware of the tax consequences, as the conversion amount is taxed as ordinary income. This could significantly impact you if the Traditional IRA balance is large. Additionally, unrelated business income tax (UBIT) might apply if your property is financed.

One option to consider is partnering funds from multiple accounts or other individuals to share in the investment, which may avoid the need for difficult-to-secure non-recourse financing. However, ownership distribution must be clearly outlined based on each party’s financial contribution, and income and expenses must be divided accordingly.

You might look into forming an LLC or limited partnership to pool funds, which can streamline asset management. However, disqualified persons cannot be involved as partners if they're prohibited from benefiting from the investment.

Overall, investing through a self-directed IRA is a strategic way to diversify retirement funds into real estate. However, strict compliance with IRS rules is essential to avoid penalties and preserve the tax advantages.

Best of luck with your investment!

For transactions like this, the Real Estate Excise Tax (REET) in Washington typically depends on the property’s value and may be progressive. In some cases, exemptions or adjustments might apply for buyouts between co-owners, so it’s best to check directly with a local real estate attorney or tax advisor to confirm the exact tax amount and any applicable exemptions.

1. Yes, you could do that, but do you really want to? The tax code is complex, and as a new real estate investor, you already have a lot to learn about real estate investing. Do you want to add studying the tax code to that as well?

2. Yes, duplex expenses need to be prorated between the side you occupy and the side you rent out.

3. Improvements generally need to be depreciated over 15 years, depending on the type and cost.

4. Tax strategies depend on factors like property type, participation level, and your goals.

5. Depreciation for a long-term rental is over 27.5 years, starting when the property is “placed in service.”

To qualify for material participation, you generally need to meet either the 500-hour or 100-hour rule. The 500-hour rule means spending at least 500 hours actively managing your rental property, which could include things like tenant communication, maintenance, and bookkeeping.You can also group multiple properties together as one “activity” to make reaching the hours easier. Meeting these requirements could allow you to offset W-2 income with deductions like bonus depreciation and cost segregation. This is assuming you passed the 750 hour rule and the 50% rule to qualify as a REPS

You’re definitely in the right place! BiggerPockets has a great community of tax professionals with expertise in various areas, including personal and business tax as well as financial planning. However, it’s essential to take the time to find a CPA who is the best fit for you.

When screening potential candidates, consider not only their experience in tax and accounting but also their familiarity with real estate investing. A CPA who understands the unique needs of real estate investors can be a valuable asset for both your current needs and future planning. Best of luck with your search!

You’re definitely in the right place! BiggerPockets has a great community of tax professionals with expertise in various areas, including personal and business tax as well as financial planning. However, it’s essential to take the time to find a CPA who is the best fit for you.

When screening potential candidates, consider not only their experience in tax and accounting but also their familiarity with real estate investing. A CPA who understands the unique needs of real estate investors can be a valuable asset for both your current needs and future planning. Best of luck with your search!

Hi David,

It sounds like there might have been a mix-up in what the accountant was explaining. I think they might have been referring to the Passive Activity Loss (PAL) limitations. With rental real estate, you can usually deduct up to $25,000 in passive losses, like depreciation and expenses, if you actively participate in the rental activity.

But here’s where income comes into play: if your modified adjusted gross income (MAGI) is $100,000 or less, you can take the full $25,000 deduction. Once your income gets between $100,000 and $150,000, that deduction starts to phase out and is completely gone by the time you hit $150,000. So, if your MAGI is over $150,000, you won’t be able to take those passive losses against other income, like your wages.

There isn’t actually an $80,000 threshold in the tax rules as far as I know, so that part might have been a misunderstanding. Hope that helps clear things up! Let me know if you have more questions about it.

I was talking to a cost segregation specialization vendor that does this nationwide. He said he does not physically visit the properties

The main reason some investors put new STRs (short-term rentals) into service toward the end of the year is to take advantage of the tax benefits, especially if they have W-2 income they want to offset. If they have passive losses from the STR, they might be able to offset some of that W-2 income through the passive loss allowance or by qualifying as a real estate professional. This is where good tax planning really pays off—not only can it help you maximize these benefits and reduce your tax bill, but it can also help determine if paying for cost segregation is even worth it for your individual tax situation.