How Qualifying as a Real Estate Professional Creates BIG Tax Savings [Tax Smart Daily 001]
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- Опубліковано 5 вер 2024
- The very FIRST episode of our new series: Tax Smart Daily. This is a daily (weekdays) video series covering tax topics and answering questions real estate investors are asking across our social platforms.
Today's topic is Real Estate Professional Status... enjoy!
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![Walkthrough: How a Short-Term Rental Investment Can Result in BIG Tax Savings [Tax Smart Daily 060]](/img/n.gif)
Thanks for the great info. My wife is going to work toward achieving REPS for our two rentals.
This was EXTREMELY helpful! I've watched this video 3 times now, thank you for making such valuable content!
Glad it was helpful and I appreciate the kind words!
Very thorough explanation of what it actually takes to qualify as a real estate professional. Great content.
What happens if you buy a property mid year? Is the 750 hours pro-rated for time of ownership?
did you ever find this out
I have been on this journey to be a REPS and your content accurate and excellent. I have been following a few REPS on UA-cam they all say research hours and UA-cam hours counts. I am glad you told me what i need to hear. Thanks for your contribution to the small business community.
Brandon: Good job. Very thorough explanation of a complex definition. I appreciate that you don't fall into accounting lingo and acronyms.
Thank you, Brandon. Very well explained. I subscribed to your channel as I find your clips on a variety of tax topics to be very useful and informative. Keep up the good work!
appreciate the breakdown of REPS. you're right, there are too many stipulations which can be easily overlooked. very informative and especially the last pearl about grouping! thank you
Thank you for commenting!
Explanation on point, thank you!
thank you very much for this. When you have time, It would be great if you could also cover REP qualification through Short Term Rental activities in combination with long term rental. thank you!
Sure thing!
I would love to hear this as well!
Thank you so much. It is so helpful and very informative.
This is great content. Very informative.
You are the first person to explain this in a truthful manner. I knew there was more to it. My question is what if your rentals are under a C-Corp are they still passive?
Do you need to have some ownership in the properties that you materially participate in to qualify?
For example, I own an owner occupied duplex that I manage/ lease, likely
Brandon, you are Awesome. You answered my question.
Brandon great video again. Want to get your insights on this scenario - If I accumulate rental passive losses year-over-year over 20 years and then retire from my regular job. Now if I do not have a W2 anymore and I materially participate in year 21 that qualifies me as a Qualified Real Estate Professional. Can I now treat all of this accumulated and carried forward loss of over 20 years against my Non-Passive income in year 21 and going forward? Thanks.
I travel 600 miles each way to my properties in NC (from Orlando). I self manage these STRs. How can that travel NOT count for material participation when I take these solo trips every 5-6 weeks for the sole purpose of making repairs, stain decks, and all around work on the cabins. Please say it aint so!
So many gems dropped here! 🙏🏽🙏🏽
Explaining this kind of thing on a WhiteBoard with Boxes makes things easier. I understand all this, but getting lost
Hi Brandon, can you please clarify a point. If one owns a non RE business and gets paid via a W2. Can one still meet the RE professional requirements. Assuming all the hours are met?
That was very well put, thank you. However, I have a question: My husband works a W-2 job, 40 hours a week, he also handles ALL of the properties we have. I have always stayed home with the kids. Could his qualification be "transferred" to me as a Real Estate Professional"? I am assuming not.
Thank you so much! This was so informative!
Thanks for these explanations throughout your channel.
How do we calculate property b passive loss amount to offset property a passive income?
Should I see a real estate cpa or any cpa?
If I have passive loss to offset passive income should I carry depreciation for a year that I will not have that scenario?
As an all activity REPS can I buy a work truck and write it off
Can you do a video on ALL ACTIVITIES REPS best strategy as they are “all in” and will benefit from more knowledge like this video
Thank you from Texas ❤
I don't understand the example around minute 17 of your video. How do you not meet the REP status, if for example you materially particapted in your rental for 500 hours (youre involved in the day to day, managing tenants, etc) and also had 250 hours of investor level education for the year. I realize there's more than one way to meet the REP status test, but why don't you meet the REP status test in that example? Thanks
Because education time is not time that will count toward REP status. Investor time could count if you are involved in the day-to-day management.
@@TheRealEstateCPA Right when I think I'm getting it lol. I had thought once material particpation was proved that education and investor time counted (around minute 14:20). What is the definition of "Real property trade or business" that is mentioned throughout the video?
@@categorylove happy to help! Crossing a material participation threshold will, unfortunately, not make education/investor time count. As for your second question: the term “real property trade or business” means any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.
Thanks Brandon. I am working towards REP status. I spent approximately two hundred hours towards acquiring new construction replacement properties in my 1031. One replacement property was successfully acquired. The other was not after the builder missed the 1031 deadline so the deal did not go through. Can I still count my hours worked actively arranging purchase of the replacement properties towards my 750 hours even though I ultimately could not purchase one of the properties?
If one person in the marriage is a "real estate professional" do the losses offset income of the other spouse (if they get money outside of real estate?)
Great video! What if the owner of the real estate investments starts a property management company, where he owns at least 50% of the company, that maintains the owners investment properties.
My wife and I own an airbnb in an LLC we self manage, I self built and GC'd, we manage day to day activities, do our own quickbooks, bookings. I also do the work at the house with contract help, painting, fixing and landscaping. Definitely spent in excess of 750 hours, I also work full time as a contractor (Software), would I be able to qualify as a real estate professional?
There is some debate on whether or not STRs count towards REPS. However, it sounds like you may qualify for whats known as the "STR Loophole", which allows you to take losses from your STR.
We have several videos breaking down the STR Loophole, including this one: ua-cam.com/video/e9EYpen7TX4/v-deo.html&ab_channel=TaxSmartRealEstateInvestors
Great information! Thanks.
Excellent video Brandon ,such clear explanation
Glad it was helpful!
GREAT SHOW. GREAT INFORMATION
Doesn’t matter how you hold title to these investment properties? Do they need to be in the individual’s name or can it be an LLC?
Sometimes the way you word your sentences could be redundantly confusing and could be worded much more efficiently, please do an updated video making your message less confusing because im certain many of us had to rewind many times to clarify the repetitiveness
Hi Brandon, If I have invested in a property as an LP vs GP, what are the tax write-off proportions? ie are these based on your equity of contribution as an LP vs GP reflected on your K1 or are these for the entire property that you can take off. I assume the former as otherwise you have to account for the LTV portion of 75-80% (mortgage part) Thank you for the information and this video..
Can being a real estate professional help offset rental losses with capital gain tax?
At 17:22 you said grouping elections
What is it, where do we make this election
If one has a 1120s and have lots of property income from it so to claim loss in active income he has to become active real estate professional
Hi! You mentioned that “managing” the Property management won’t count against REPS, but how about an Asset Manager role that owns % from Multifamily GP syndication and participate on the management of those assets? And considering most of those large MF assets has a PM company managing daily operations. Does qualifies ???
What if I work in apartment maintenance for a management company or as a leasing agent for a management company or even a property manager at an apartment complex for a management company. Do any positions qualify as hours towards being a real estate professional?
So is he saying you can’t have a full time W2 job and qualify for the status? I’m a teacher and do my real estate management in the evenings and weekends.
great info!
Great content. I am wondering if you could clarify what 'jobs' count towards the REPS status. Realtors which you mentioned, but what about Builders, Remodelers, Subcontractors like Plumbers etc..... And if any of those *do* count, do you need to own a certain % of the company if you have partners etc....? Thanks, Dan
I am in the military but fully manage duplex property ..advertise, write leases, coordinate repairs, maintenance, check on the property .. well more than 750 hours.. but main income is the military. How do I report that on taxes ?
Not fully following qualification/non qualification of investor level hours. You mentioned investor level hours don't count toward material participation or REP qualification UNLESS you are involved in day to day. Do you mean that if you do property level work as property manager in addition to investment level asset manager work then you CAN or CANNOT combine the hours to count toward REP? Combination does not count toward material participation correct? Thanks
What if you work as a client manager/interface fully employed 40 hrs a week by a commercial real estate company?
As a REP can you deduct passive losses from an IRA distributions >
Hi
Thanks for very informative video!
-Are the 500 hours of material participation in addition to the 750 hours( total 1250 hrs??)
-If the 500 hours are “ within “ the 750 REPS hours, then can both spouses contribute toward the 500 of the 750 hours?
Appreciate any input.
What if you own a business that employees manage, which free up your time?
An opinion. Some hear say from a RE tax attorney that only pans out depending on your IRS tax auditor/IRS attorney/tax court; If you claim REP, AND you are audited, AND you are found to have not followed IRS reqs like filing 1099's to ALL contractors blablabla, your audit will go worse for you. Now what does "worse" mean? Is this true? Well given IRS auditors not being experts, nore their attorneys, nor often the tax courts, its highly variable. I chose to reduce risk since I have no losses least anywhere near $25k/yr I dropped claiming REP!!!!! I'd do it again. No value to me anyway. Just a vanity claim IMHO. Very few actually can benefit; Up north rentals, huge PITI, huge expenses, well exceeding $rent blabla and income from W2 >>$150k where it rolls off deductability unless you are REP. Very view it this narrow target. Too much risk re IRS audit treatment. FWIW I moved my Sched-E up to a 1065 partnership return to clean up my 1040 to be very simple and low risk. 1065's are much lower audit rate. (IE form a multi member LLC then you have to file 1065s). Best to all.
I’ve enjoyed a lot of your videos on real estate and taxes. I also have learned how misunderstood this subject is for many investors as well as “CPA”. Is there anyone you work with in the chicago area that I might be able to meet with? I have a few properties and I’m looking for good and honest tax strategy help.
Thanks and once again great content!
Our firm might be able to help as we work with real estate investors across the country, including Chicago.
You can learn more and request an initial consultation here: www.therealestatecpa.com/youtube
You might want to check out losthorizons.
I was involved last year. I am a real estate professional, I reported as non passive income, because I work 100% on Real estate and participated more 750 hours. This year I hired an administrator because I am working more on properties sales. Do I need to report my rental income as passive? Can I do it without any problems? Thank you
Hi Great video on Real Estate Profressional status. I do have a unusual question. I did a remodel unit was gutted and vacant. I camped out on a blow up bed as I was having a bear problem that did a lot of damage in previous years and didn't want Mama bear coming back. can i claim those hours for camping out? I am out of town Landlord who manages the property myself and was woking on the property myself too. Thanks Linda
I’m on the HOA board for the community that my rental property is in. Do hours spent doing HOA duties count towards REP Status?
Please cover the safe harbor election.
Happy to! Which safe harbor election are you referring to?
@@brandonhall8446 Safe-harbor as it pertains to rental properties and the real estate professional qualification. If you could go into more depth on it I would appreciate it. Thanks
Hi Brandon. Thanks for sharing this information. I am thinking about investing in a 37 unit JV out of state. All 6 partners have a percentage of ownership, voting rights, sign on the loan and an active role. My role would be to prepare and update the financials. Would the hours spent in this role count towards material participation? Thank you!
Hi Brandon, great video! I have signed up for becoming a client;
I work 1000 hours (1099 consultant) and all other time I am working in acquire property and management of the rental (5 of them); Do I need record more than 1000 hours to meet 51% rule? Since I am spending more than 1000 hours (approximately 300 h is to learn how to do PM).
Or I am not eligible because other job is more than 750 hours already ? Please advise.
This is really great stuff. How can I get ahold of you to ask some questions?
My CPA is not proficient with these strategies. How do I engage with your company?
you can learn more and request an initial consultation at www.therealestatecpa.com/become-client
Hi Brandon, I really enjoy and appreciate the content, thanks very much for putting it out there. Two quick questions: First, you and Thomas seem to be extra careful to say "non-passive income" instead of "active income" just curious as to why? Second, I qualify for REPS - can non-passive losses be used to offset / minimize / avoid self employment tax? In other words is the 15.3% self employment tax paid on gross income, or net income after deductions (including non-passive losses)? Any insight appreciated and thanks again for the content.
Thanks for the kind words. When we are talking about Sec. 469 and Real Estate Professional Status, there are effectively two buckets of income: (1) passive; and (2) non-passive. When people use the word "active" they typically mean they are materially participating in the rental or business activity... but for Sec. 469 purposes, material participation means you have "non-passive" income (i.e. active income). In tax, different words mean very different things even if they are similar to each other :)
Your self-employment income will be subject to the 15.3% tax before you can factor in a non-passive loss. So, unfortunately, REPS will not help you avoid the SE tax. Great question (and one I may talk about on a future video)!
Loved the video! Question, my spouse is involved in multiple activities on our first rental ( I have a w2 full time , she does not).but looking at your video, we want to make sure that we are in compliance with the IRS. What do you recommend to track these activities and have proof in the case of a audit? Also, have you seen audit with the IRS with people with a small portfolio?
I recommend you track time in Excel or some other app. We have a simple excel tool that we give to subscribers @ www.taxsmartinvestors.com
I have a question! If I am managing our rentals but when work needs to be done, my husband (who is a contractor) does the physical labor on our rentals, can/when can I count his hours?
Does a real estate portfolio manager/finance or refinance manager pass as a real estate professional?
I very much enjoyed your information, it seems to me if I would get audited, I would need extreme detailed documentation to justify my real estate professional status, is that correct? 0:04
Looking forward to this series.
Can REP status be attained through participation as a General Partner in a syndication even if e.g. property management has been outsourced to a specialist company? Obviously there are e.g. weekly calls with the property management firm to optimize operations of the property.
Thank you
It can be, but it depends on the facts and circumstances. If you are a GP because you just raised capital, and you're not actually operating the deal, you may be at risk.
If you have a rental, does going to the property and cleaning it count as hours toward material participation? Thanks
How do you make that grouping election of all your rentals? Is it by a form? Thank you.
Thank you for the valuable information! My question is what if my full time job (W2) is a hotel manager but I do not have interest nor ownership in the hotel, would I qualify as a real estate professional and be able to take the passive loss from my personal rental property To reduce my w2 tax liability ?
Your hotel manager job isn't going to help. On top of that you now have to spend more hours on your rentals than your W2 position. So you'd need more than 2080 hours a year. Revenue agents would argue against you.
According to what you said at 13:30, which you were referring to real estate agent, do you mean “materially participate” equal to “property management”?
What about spending 500 hours to “rehab” the property? Because I am thinking property management company is better than doing it on my own.
Can I spend 200 hours in self property management while having the property management company to do all the hard works, 300 hours in rehab, and lastly 250 hour in working as a real estate agent or appraiser?
Great question! Material participation is defined as "regular, continuous, and substantial" participation and it is further defined by 7 quantitative tests. You'd need to meet one of the 7 tests.
It sounds like your 200 hours + 300 hours + 250 hours strategy could work. You'd want to verify that each of these is a "real property trade or business" that counts toward REPS. And because you'd be self-managing your rentals, you'll likely be materially participating in them.
Does a certified home inspector with a licensed business who doesn’t own a rental property qualify as a real estate professional?
Hi, do you have a video dedicated to showing being a w2 employee and qualifying for REPS. A friend thinks he can do it and I’ve suggested otherwise
What if I am on long term disability and not working? 750 hours right?
Thanks for this informative video, Brandon. What supporting documents/evidence do people typically provide to support the 750 hours and material participation?
You need a time log that documents your real estate professional hours. You can use a spreadsheet or something more fancy like Toggl.
The time log should be updated at least weekly.
Hi Jason, at 5:50, you were talking about working 750 hour in any real estate traded business in order to qualify for REPS. What about working as an appraiser without self property managing my own property? Does it work?
If you work as an appraiser, you may be able to count the hours toward REPS, but you'd still need to figure out how you're going to materially participate in your own rentals... otherwise, they will still be passive.
I started a NC LLC to start wholesaling real estate full time. I hire, fire, look at contracts, negotiate with sellers & buyers, I am involved in the day to day procedures, including going to the sellers homes. My company goes under contract with the seller, sell my assignment rights over to the end buyer. I currently do not own rental properties. Only my primary residence & I am converting my upstairs to a separate entrance & will be using it as an airbnb. My question, does full time wholesalers, my husband & I are full time, qualify as a real estate professional according to irs? Do we qualify to use your services?
Wholesales qualify as a REP but the whole purpose is to write-off rental losses... if you don't have rental losses, you don't need to be a REP.
What if i work 12 hrs of work 5 days and has 5 days off . I work full tine but then i work 5 days and off 5 days. Will that qualify
So remain your own property manager.
Pretty much
Thank you for the video! Do losses as an LP in a syndication work as a tax benefit for REPs?
Generally only if you qualify for REPS and spend more than 500 hours on properties do you self-manage and then elect to treat all your rental activities as one.
And if you're asking if LP investments can help you qualify for REPS they generally won't as by default you're considered not to be materially participating in LP investments in the eyes of the tax code
@@TheRealEstateCPA thank you for the reply. I think I could qualify for REPS based on your videos (I self manage my other rentals) but before I go to the work of looking into that further, I wondered if some of my passive loss could help with my ordinary income (if I was a REPS).
My wife and I are realtor, and we are working for the same broker. What entity that you recommend and LLC or and S-Corp
It depends on the state you live in, the amount of income you expect to earn as well as your other income streams to know for sure.
Without knowing the details, an LLC generally wouldn't be a bad place to start as you can make an S-Corp election if/when the time is right.
@@TheRealEstateCPA I live in Florida
@@TheRealEstateCPA When you mentioned income, is it net income or gross income? Thank you
This is super helpful, but I have a really specific question. I started learning about (studying through a program) about Sandwich lease options in late March of this year. I worked until April then hired a team of 1099 to help me. We didn't close a deal because in June I saw what was happening in the market so I pulled back. In aug/Sept we decided to buy rental properties. We went to open houses every Saturday and Sunday, got an agent, put in a few offers, got one accepted on Nov 27. We closed 12/8. I have hired property mgt, but I have personally overseen, been on site for, and done everything. They are listing it today (12/28). I have over 52 hours in directly at the property or working on it from home since seeing the house in Nov. I have all those study hours for the program (not accredited), active calling on properties and leads, and contacting financing sources, etc. I am the one doing all of this (although hubby has gone to property with me a few times to do some of the work while I was also doing work). It is almost $30k in learning, repair costs, supplies, inspection etc. The property won't generate any income until 2023 (since it is being listed today). Would I pass r.e. pro? We have the income (w2) to make this deduction valuable. This is only job except a few weeks substitute Interpreting this year. Thanks
Hey Brandon, I found your channel from the short term show podcast with Avery. I own short term rentals in Tennessee. My wife runs the Airbnb/VRBO. This is her only job she’s a stay at home mom for our kids. Can we qualify her as a real estate professional? Thank you!! Love this channel 👍 I’m writing this 10-17-21
I own two house and I let my mom live in one, don't charge her any rent. I haven't depreciate my house and I don't want to depreciate it. Is it mandatory to depreciate the house I let my mom live in?
No rent it’s not a rental! You aren’t charging reliable rent
Why did you guys rebrand or change the name of your channel? Didn't you guys used to be "the real estate cpa"? I was looking for a video to reference of your alls and couldn't find the channel until I saw you all had changed the name. Lol Just wondering why.
We did! We created a Facebook group called Tax Smart Investors and wanted to build an educational brand around that. We still run the Real Estate CPA and are always taking on clients :)
How do I cover contracted services like a guy a paid cash to paint the apartment? Do I need to get his ss# and issue a 1099?
Yes, you need a Form W-9 from him. That will give you the needed information to file Form 1099.
Travel time counts. It doesn’t count. Um hello.
Thorough and fully confusing
This helped me SO much! thank you!!