Real Estate Professional Status – Can I Use My Husband’s Passive Losses?

Question

Hi BP Community,

I’m looking for some clarity on the tax implications of becoming a Real Estate Professional.

My husband is a high W-2 income earner, and I’m considering leaving my job to qualify as a Real Estate Professional (REP) to take advantage of potential tax benefits. He currently owns 4 rental properties that he purchased before we were married, and they are still titled solely in his name.

My question is:

If I qualify as a Real Estate Professional, and we file jointly, would I be able to materially participate in his properties — and, if so, would we be able to use the passive losses from those rentals to offset his W-2 income?

Additional questions:

• Would it be beneficial for him to sell 1% ownership of those 4 properties to me, so I’m technically a co-owner and can more clearly establish material participation?
• 
• Going forward, we plan to form an LLC with 50/50 ownership to acquire new investment properties — how will that affect our ability to use losses?
• 
• What about different types of properties like turnkeys, syndications, or other passive investments — do those losses count toward what we can use to offset W-2 income if I qualify as a REP?

Would love to hear from anyone who’s navigated this or has insight into how the IRS views ownership and participation in these scenarios.

Thanks in advance!

Basit Siddiqi · Answer

Suspended passive losses will retain their characteristics of passive losses. Claiming real estate professional status will turn passive losses into active losses for those losses in the year that you claim real estate professional status.However, it will not convert prior passive losses to active.Best of luck

Sara Murphy · Answer

Thanks @Michael Plaks & @Sean O'Keefe— your insights are incredibly helpful and much appreciated.

We’ve been working with a CPA who recommended we explore Real Estate Professional (REP) status, given our current and projected real estate activity.

• My husband earns $500K W-2, and I currently earn $40K W-2. He will cover our $15K/year family health insurance if I step away from my job.
• We have three young kids, and being home with them — while also focusing on our real estate — would give our family more flexibility.
• For 2024, we have about $30K in passive losses that will roll into 2025.
• Our plan is to continue acquiring properties and utilize cost segregation to accelerate depreciation.
• Most properties in our area range from $400K–$600K, so each acquisition will likely generate a meaningful paper loss with bonus depreciation.

does this sound like a sound strategy?

Michael Plaks · Answer

Lifestyle-driven decisions is exactly what I was advocating for. The concept makes sense. The implementation matters, and the numbers matter.

But since you have a CPA to work with, you have someone who should guide you through this. Otherwise you might need someone else who can guide you. Best luck.

Aaron Zimmerman · Answer

@Sara Murphy - to add, I think if you're quitting your job, you will want to consider a career in real estate. It is much easier to qualify for real estate professional status when you have another business (I.e. realtor) and then find a way to materially participate in all the rents. You would basically need to work on the properties for 187.5 hours per property for the year to qualify.

if you are a realtor and assuming you meet the reps requirements, you would need to materially participate which is a much lower bar to clear.

Michael Plaks · Answer

@Sara Murphy

Before I answer your specific questions, let me comment that I cannot agree with quitting a job if it is done for tax benefits. If you have other reasons to quit your job, then it's a different conversation, and then tax benefits can come as a bonus. Icing on the cake, not the cake.

To illustrate my position, you know who really should quit their job for tax benefits? Your husband! Without all this income of his your taxes will go waaaayyy down. :)   See what I mean? Taxes cannot drive your life decisions.

One other very important point: we don't have any numbers on your overall tax situations, especially on your husband's rentals. Without this information, we cannot estimate how much tax benefits there is to go after, to begin with. Maybe a lot, and maybe not so much. Figuring this out should come first, before going for REPS.

And last thing: it may not be easy for you to qualify for REPS with these 4 properties if they all have stable long-term tenants. But this is also a different topic.

To your questions:

- yes, you can work on his properties

- no, your ownership is not required

- your potential LLC will not save you any taxes

- but an LLC can hurt you in more than one way, depending on your state

- LLCs are created for legal liability reasons, not for tax reasons

- passive investments will not help you tax-wise, most likely, but it's a topic too broad to address in a forum post, it's for a tax professional consultation. Here is a long and technical post on this topic, however it's for general education and not to draw conclusions for specific situations, as your mileage will likely vary:
https://www.biggerpockets.com/forums/51-tax-legal-issues-con...

- the most common way to combat high W2 taxes using real estate is with short-term rentals (STRs), but it is also a separate topic. You can start here:
https://www.biggerpockets.com/forums/51/topics/1122635-the-s...

Rohullah Sharifi · Answer

1. if you meet "Material Participation Test"

2. maintain proper record

3. involvement in STR

4. May register a business as partnership

5. Should qualify as REP

6. Losses can be claimed against active income

7. But only REP without rental might not lead to losses

Jason Malabute · Answer

Yes, you can work on your husband’s properties as a Real Estate Professional and that would count toward material participation. Your ownership is not required for this purpose.

Forming an LLC will not save you taxes—LLCs are generally created for legal liability protection, not tax benefits.

Sean O'Keefe · Answer

There are other real estate activities (e.g. real estate agent, property management, construction, etc.) that you can do, in addition to rentals, that count toward REPs hours. I’d explore this with your current CPA since this is what you’re paying them for and should be helping you with.

Sean O'Keefe · Answer

First, before you quit your job to take advantage of the tax benefits of Real Estate Professional Status (REPS) you may want to find a tax professional who can help you navigate the best Tax Strategy for your specific goals and tax profile and filing.

To answer your questions about REPS.

• To offset non-passive income (e.g. W-2, 1099, etc.) with long-term rental (LTR) rental losses you must meet the IRS requirement for REPS (below) AND you also must materially participate in each of the rental properties or make a grouping election (note: risks to grouping election you’ll want to clarify).More than 50 percent of your time in real estate trade or business (e.g. rentals, construction, real estate agent, etc.)More than 750 hours of service during the year.
• More than 50 percent of your time in real estate trade or business (e.g. rentals, construction, real estate agent, etc.)
• More than 750 hours of service during the year.
• For married couples who file jointly, only one spouse needs to qualify as a real estate professional.
• Material participation has 7 tests. You must meet one of the 7 tests.
• Unlike with REPS, for married couples who file jointly, the hours of both spouses can be combined to meet material participation.

• More than 50 percent of your time in real estate trade or business (e.g. rentals, construction, real estate agent, etc.)
• More than 750 hours of service during the year.

Note that 4 LTR rental properties may not be enough work for you to justify 750 hours to meet REPS. You could explore combining hours from management of 4 LTR rentals with another hours from another real estate business.

Answers to your “Additional questions”:

• Would it be beneficial for him to sell 1% ownership of those 4 properties to me. No, this wouldn’t be beneficial for leveraging REPS / material participation to provided you meet the above requirements I listed in # 1- 4. You don’t need to own 1% to do this.
• Going forward, we plan to form an LLC with 50/50 ownership to acquire new investment properties — how will that affect our ability to use losses. Forming an LLC is for “Personal Asset Protection” and doesn’t impact your ability to leverage REPS / Material Participation. You should get both a LLC and Landlord insurance as part of your “Personal Asset Protection” strategy.
• What about different types of properties like turnkeys, syndications, or other passive investments — do those losses count toward what we can use to offset W-2 income if I qualify as a REP? Unless you materially participate in the “turnkeys, syndications, or other passive investments” it’s unlikely that these would help offset your W-2 income. I say unlikely because there are a couple of other options, like STR or Grouping Election, but are beyond the scope of this post.

The tax benefits of REPs can be significant when combined with the right tax strategies. As a result, it’s worth it to invest in getting a strong Real Estate Tax Pro that can help guide you through maximizing the benefits of REPS and accurately filing.

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This post does not create a CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.

Real Estate Professional Status – Can I Use My Husband’s Passive Losses?

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