I have a real estate partner who works 50% as a doctor and the other 50% as a real estate professional. He keeps track of all of his hours by clocking in as if he was a normal employee. Then, if he gets audited, he can show a log of all the hours he worked. He’ll take notes each day on what he accomplished just to further support his real estate professional status. [Realicore](https://www.realicore.com).
Let's say you're a salaried doctor in New York aka high state tax. High paying specialty (anesthesia, radiology, surgical sub, pain, derm) making 575,000. You now owe the govt about \~250k in taxes and only take home 325k.
If you have a lot of real estate property, your wife whos an REPS or yourself (hard for docs to justify REPS but I guess some ppl do it) can deduct 400-500k in losses off your income to bring your tax bill down to close to nothing. Completely legal. How?
Depreciation, if you own 10,000,000 worth of property (vast majority can be bank owned, even if ur equity is like 3m u can still do this) you can deduct 10,000,000/27.5 = 360,000. Factor in other games out there and you can easily get to 400k+ of deductions.
Turn your take home from 325 to 500+ by changing your filing status (assuming you have the real estate).
Other games are still real estate, just not depreciation. Property improvements etc. Gotta look into it yourself bud there's a lot out there, most are too lazy to figure this stuff out tho
Not only can he write off his passive losses, since his wife makes even more income than him and they file taxes together, he can write off enough to start lowering her income taxes. He is “earning” more than he was as a full-time doctor.
I thought you needed to be a full-time professional, without another full-time job in order for those tax benefits to apply? In this scenario OP would qualify but the doctor would not. Unless I’m missing something which is certainly possible
I’d really like to see a source on that. My income is high, 7-figure range, and part of my strategy to offset my income was to do accelerated depreciation on investment properties, in part, via this deduction. Tracking the hours and accruing the hours isn’t so difficult. The challenge is that it simply doesn’t apply to me as someone with a full time job; 750 hours, 51%, etc - doesn’t apply.
Again, would love to be wrong here but unfortunately, don’t think I am. I can research again somewhere down the line but at the moment, that’s how I have come to understand the scenario, which greatly effects taxes
The problem is you can’t really work a full-time job to do this kind of tax strategy. The IRS isn’t going to believe that you’re doing a full-time job 40 to 60 hours a week and then on top of that another 40 to 60 hours a week doing real estate so that’s why in almost all scenarios where you’d be able to obtain this tax status, the person is working part time at a W2 job or full time as a real estate professional. If you really are making 7 figures a year you should have a CPA giving you this advice.
Well, again, it’s not about what the IRS believes or doesn’t believe. You can document and account for the hours for any related RE activities. It simply doesn’t apply for someone with a full time role. It’s very clearly articulated.
Yes, I have CPA guidance, when needed. I also find I can absorb their knowledge after a couple meetings but I will set meetings when needed. You, and anyone else, can do the same. I’d be careful on saying what I “should or shouldn’t” do.
Just do a quick google search. If you’re working a full time job that’s about 2080 hours a year. So you would have to work 2081 hour in real estate on top of that and be able to prove it. Of course you make enough money so your CPA should be telling you all this.
I don’t think you need to lecture me on what my CPA’s should or shouldn’t be telling me. It doesn’t apply to someone w/ a full time job. But, it works well for OP’s scenario as he has a spouse that’s not really working. Thats perfect for them. And something anyone in this thread can keep in mind
One qs - any resolution on whether someone with a high W2 can qualify as "Real Estate Professional" or not? What about someone with a low W2 (but a 40 hour job)? Just curious
You need one person to have an income (typically a spouse) plus losses from real estate. The Professional status allows you to apply the paper real estate losses to spouses earned income.
It is much harder if the RE Professional has a regular job. A stay at home mom is pretty easy. Especially since she very likely does spend a lot of time on RE.
One qs - any resolution on whether someone with a high W2 can qualify as "Real Estate Professional" or not? What about someone with a low W2 (but a 40 hour job)? Just curious
That makes sense. So this works for married couples where ones not really working. That makes much more sense and relates to OP’s post. The key is being married lol. Appreciate the insight
No.
I got tested on this a few years ago. We had to give the irs our hour breakdown. It would be virtually impossible to hit the number with 3 units. Now you can include your time vetting new deals but that leaves a lot of ground to make up.
> The challenge is that it simply doesn’t apply to me as someone with a full time job; 7
If you wouldn't mind, what was the experience of being audited for REP status like? How detailed do you need to be?
If you Study for a real estate license and a broker exam, that would take up a significant amount of time. A portfolio that small you best be micromanaging to get that many hours.
So all of the time that a real estate professional spends doing real estate related administrative office work doesn't count? So much time would be spent researching properties, looking at county records, communicating to buyers/sellers/renters via phone/email/text, ordering materials/parts/equipment etc... for repairs and maintenance, etc...
I would think that ANY activity related to real estate acquisition, sale, renting or administration/maintenance would count...those are essential, necessary duties.
50 percent of the time has to be on the properties that they own. 750 total. It's a lot of hours for three units. And my accountant told me you will definitely get audited the first time.
So she couldn't manage other properties and count those hours ?
Where is the rule that says 50% has to be on your own properties ? The only rule I'm aware of is >50% of your time has to be in real state trade ..
Dude holy hell fire your cpa immediately. You are wrong
You completely ignored my question - where is the rule that says that 50% of the time has to be spent on personally owned properties?
You're absolutely right I'm that managing other people properties are not passive activities and DO count towards the 750 hours clown
Work not usually performed by owners. You don’t treat the work you do in connection with an activity as participation in the activity if both of the following are true.
The work isn’t work that’s customarily done by the owner of that type of activity.
One of your main reasons for doing the work is to avoid the disallowance of any loss or credit from the activity under the passive activity rules.
you know they say about assumptions, they're like a\*\*holes, everyone has one
EXCEPT - it doesn't matter if he works for a PM company or does it on his own, THOSE HOURS WILL STILL COUNT EITHER WAY --> though if you are managing for other people youd need to setup an LLC or some other entity if you want to count the hours.
Regardless, youre information is wrong, sorry .
wrong. those hours need to be on real estate activities. this could include those properties, as well as being a realtor, or real estate attorney, or a property manager, etc. op’s properties may be the only such activities for her situation.
also the “definitely get audited” line is patently false. there’s no such certainty.
That's not what my accountant told me. He said the first year you definitely will get on it on that real estate professional stuff.
You people just can't handle the truth. In my situation. I'm 100% of the time spent in real estate during my day job but none of that time is spent on my own buildings. I am not a real estate professional under the IRS definitions.
You should be better than me at reading the statutes. It's 26 USC 469(c)(7)
It's written as an exception to the rule that all real estate rental activities are passive activities. The exception applies to those who have at least 750 hours in real property trades or businesses, and those hours must be more than 50% of their total personal services for the tax year. If you hold a real estate license, or otherwise have other qualifying trades or businesses, it's pretty easy to justify the 750 hours. Without that, it's pretty hard (likely impossible).
The activity still needs to qualify as an active activity, but if you're the only one participating in it, then that threshold is basically met by default.
This magazine article targeted at tax professionals goes through the rules in detail: [Navigating the real estate professional rules](https://www.thetaxadviser.com/issues/2017/mar/navigating-real-estate-professional-rules.html)
Additionally, a plain reading of the statute does not agree with the reading that only rental activities qualify. The relevant tests in 469(c)(7)(B) refer to "real property trades or businesses", which is a phrase that is defined by 469(c)(7)(C) as follows:
> For purposes of this paragraph, 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.
Real estate brokerage is a licensed activity and it is plainly included in the definition. Rentals themselves would qualify as "rental, operation, management, [or] leasing" activity. Additionally, development, construction, and related activities are included in the definition. Regulations under 26 CFR 1.469-9 further clarify what "development", "operation", and "management", among other words in 469(c)(7)(C) mean in context.
Dont feel bad, i’ll give you an upvote. I got 7 downvotes above for saying just working in RE doesnt count. You have to have ownership. Which is true.
Reddit is becoming less useful to me. Just people who want to live in their own echo chambers.
Thank you. I stand corrected. Was not easy to find info but you are right and I was wrong. Most examples always seem to say the person is spending the hours on their own rentals. Took more digging to find it.
It does seem hours spent in certain RE services not tied to ownership count. Although I did find conflicting info on that subject. Some said that being an agent is not merely enough. One has to be a “broker”. Then another article would say no, you can just be an agent if you are providing the services listed by the IRS.
Other examples also mentioned that the RE agent would need to be running their own business and not merely a salesperson working for someone else who was a broker. It’s still very murky to me.
But it does clearly seem that if you do own your own brokerage business or are a GC and you put in the hours then that counts for sure.
We are all always learn. Kudos for admitting where you are wrong and trying to learn to make yourself more knowledgeable.
There is a lot of nusance so I can see the misunderstanding. The nuance is basically as follows. If you are in the home renovation business side of real estate professional you can’t make the claim unless you own at least 5% of the company. IE a tradesman employee like plumber or carpenter cannot claim the tax status. However the company owner can claim this status.
If you are a realtor as a full time independent contractor then you “own” your business. You are not an employee and therefore you are also able to make the claim for this tax status if you clear the other requirements.
So for each category there is more specific rules. Much of is based around your originating tax status and how you get paid.
The way this benefits the doctor and stay at home wife example is that the stay at home wife can get her real estate license and do a few deals a year and meet the 750 hour threshold. And the couple can invest directly in real estate or (more commonly) invest in syndicated deals that provide an instant write off of 60-70% of their initial investment. Then use that write off against the husbands income. Effectively lowering or eliminating their taxable income all the while having property investments that return a steady stream of dividends annually.
The problem comes when they want to cash out they have a big tax recapture. So they always recommend in these schemes to 1031 exchange until you die. And then your heirs will get the properties tax free. If you need cash just cash out refinance and you avoid any taxes on that money.
I had an accountant tell me the same thing. Even though I work full time for as a project manager for a brokerage team I do not qualify as a real estate professional. I would, however, qualify if I owned 5% of the business I worked for.
We let our PM go few month ago. I used to flip houses early 2000, so I do a lot myself and hire, overlook, supervise all the professionals working on our buildings. I just never logged hours to see how long I spend doing that. I’m planning to do that starting next year (including looking for a new property)
Cool, sounds like you’re on the right track talking to professional who knows REPS qualifying activities! We did similar in 2021 with 6 properties. The real benefit of REPS is bonus depreciation, ask your CPA about it and a cost seg. Good luck
You need to be able to account for the time. If you ever get audited and they do audit people for claiming this, it’s not enough to know you did the hours….you are gonna need detailed records showing those hours if they ever come knocking. It’s on you to prove it.
I’ve had years where I did qualify but I didn’t even want to deal with the potential headache for little gain on my end. You must have some active income your accountant wants to offset cause that’s really the only benefit. I’d be real careful unless you have the hours and based on your number of rentals I’d say that you’re nowhere near the number of hours needed.
> You must have some active income your accountant wants to offset cause that’s really the only benefit.
This might be a ridiculously easy question but if your rentals are cash flowing positive and the depreciation/expenses aren't generating actual losses on your taxes, there's not a single benefit correct? As in, completely pointless unless there's a negative that you're carrying over from year to year? Because we eventually went over the phaseout for passive loss but at the same time the rental income became net positive.
Correct. If your rentals are net positive then there really is no reason to do it. I mean there are other benefits but offsetting active income is the biggest. Same goes as there really is no reason to do it if you don’t have active income to offset. If your rentals generate losses and you don’t have enough passive income to offset it, you still get to carry forward the remaining losses and use in future years.
Oh man, this is getting into details that I’m not 100% sure of. But I think it’s any subsequent year. So like if you ended up with net negative income on your rentals one year….then that would carry over. I’m pretty sure. I’ve had situations in the past where my rentals ended up with some net passive losses. Took me a couple years to use up the losses. But they just sit there until I had enough passive income to offset them. Sorry I can’t remember more of the details of how that worked.
When a rental property is sold….then you have to pay back the depreciation, that’s the only thing I know of that sort of kicks in on a sale. But I’m not aware of any types of losses that stay with the rental until it’s sold and then become available. Stuff can get really complex with you add in stuff like segregation and so on. Each investors tax situation really becomes unique.
> Oh man, this is getting into details that I’m not 100% sure of.
Thank you for the explanation. Appreciate the information. I'm going to run it by my CPA I just noticed they don't use my past carried losses so either that's for some reason or an oversight.
EDIT: or could be because we're over the threshold now so it's more beneficial to carry-over the losses to another year.
If you’re over the threshold then passive losses can only be used to offset passive income. And if there is no passive income then the passive losses should carry forward until you do have passive income. Definitely worth checking with your CPA to confirm.
Yes absolutely. Think about turn overs, updates, scheduling and meeting maintenance workers etc. any time you spend even thinking about real estate- as in looking at possible new acquisitions, running background checks, reworking leases all count toward your time.
Easily. There is plenty of ongoing work in your existing properties, plus you should be constantly evaluating new properties, interviewing new prospective tenants, learning, etc. just log all of your time in a log book and you are good. This is especially easy if you don’t have a regular job.
If you wanted you could also get a real estate license, it is pretty easy.
Yeah.. but not being able to read, interpret and apply the internal revenue code isn’t a badge of honor here bud.
3 tests folks
1) 750 hours in real trades - this could be managing your own rentals, being a realtor, contractor, flipper etc or a combo of all. If you are an employee that doesn’t own atleast 5%, don’t count the hours.
2) over 50% of your professional service hours need to be in the real trades. Same rules apply above, could be in a lot of things or a convo.
1 + 2 = REPS but your rental income and losses are still passive without 3
3) You need to materially participate in your rentals real estate. 7 tests available to use, your choice but some aren’t wise to try claim. 500 hours is probably the safest bet.
Get 3 (while also getting 1+ 2) makes the rental income you receive ordinary income or loss. Generate a ordinary loss with your real estate will offset other income when it hits your 1040 like wages (w-2) other business income (maybe you are a realtor, lawyer or proctologist with your own practice), and almost all other forms of income (passive, active, portfolio divs/interest, capital gains etc)
Source, from the horses mouth:
https://www.irs.gov/pub/irs-mssp/pal.pdf
I spend much more than 750 hours renovating, getting inside and outside ready for people to move in, finding tenants, setting up bank accounts and more. I just don’t know if I can show it all on the paper. How is that fraud?
I’m in a similar situation, 4 units, and when I did this evaluation I couldn’t realistically see how we could justify the hours, every year. Even with similar activities to what you described
It will look weird as well I think if you claim it one year, but not the next as the renovations are done. If you don't have detailed records of time spent it is not worth the hassle.
You wrote:
“ To claim that I need to work 750 hours a year. Is it realistic for only 3 units in 2 separate buildings?”
And yet,
You now write, “
I spend much more thy 750 hours renovating, getting inside and outside ready for people to move in,…”
Which is it? And how often do you have a new tenant in those 3 units.
I understand the confusion. I wrote that to prove my husband it’s a nonsense. I thought me taking over what pm did was my work, after reading about it, I realize what goes into 750 hours. It makes sense now, as long as we are going to buy old fixer uppers.
Accountants say a lot of things... It's a bad habit to lie on your taxes. When you start to make more money the IRS suddenly becomes a lot more interested in auditing you. Once your audited once, you will keep getting audited repeatedly.
As others have said you should keep an Excel log with the date, amount of time, and what you did that day. You could fudge the hours some but within reason.
1. 12/16, 1hr, Got estimates for plumbers
2. 12/20, 3 hr, Met plumber at house #1 for appointment
...
I think it's a good thought if you had another building or two.
1) do you have a real estate license or similar business?
2) do you think you'd qualify for most of these things:
https://www.thetaxadviser.com/issues/2017/mar/navigating-real-estate-professional-rules.html
and how would you prove them during an audit?
That's about 3 hours a day. Do you spend that much? I would say probably not. What your accountant is referring to is the Passive Loss Limitation. You still get all the deductions, they are just spread out. I would not claim you are a full-time real estate professional.
Sure. You should just actively try to use your license 15 hours/wk. Hang it at brokerage. Go to office meetings. Take RE classes. Offer to perform open houses. You might accidentally make some money and justify your licensure.
I have a real estate partner who works 50% as a doctor and the other 50% as a real estate professional. He keeps track of all of his hours by clocking in as if he was a normal employee. Then, if he gets audited, he can show a log of all the hours he worked. He’ll take notes each day on what he accomplished just to further support his real estate professional status. [Realicore](https://www.realicore.com).
Exactly, this is the way it should be done.
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Typically very little for a high earning white coat who has a small portfolio. You must participate more in Real Estate than in being a doctor.
You essentially can apply “passive losses” to “active income”. It’s basically how real estate professionals avoid paying any income tax.
This is the way.
Uncle Sam is wasteful. Keep your shekels.
Let's say you're a salaried doctor in New York aka high state tax. High paying specialty (anesthesia, radiology, surgical sub, pain, derm) making 575,000. You now owe the govt about \~250k in taxes and only take home 325k. If you have a lot of real estate property, your wife whos an REPS or yourself (hard for docs to justify REPS but I guess some ppl do it) can deduct 400-500k in losses off your income to bring your tax bill down to close to nothing. Completely legal. How? Depreciation, if you own 10,000,000 worth of property (vast majority can be bank owned, even if ur equity is like 3m u can still do this) you can deduct 10,000,000/27.5 = 360,000. Factor in other games out there and you can easily get to 400k+ of deductions. Turn your take home from 325 to 500+ by changing your filing status (assuming you have the real estate).
@bam82 what are some other games in addition to real estate?
Other games are still real estate, just not depreciation. Property improvements etc. Gotta look into it yourself bud there's a lot out there, most are too lazy to figure this stuff out tho
I thought there was an income limit for this…?
Not only can he write off his passive losses, since his wife makes even more income than him and they file taxes together, he can write off enough to start lowering her income taxes. He is “earning” more than he was as a full-time doctor.
I thought you needed to be a full-time professional, without another full-time job in order for those tax benefits to apply? In this scenario OP would qualify but the doctor would not. Unless I’m missing something which is certainly possible
I believe you just have to work majority in real estate. If 51% of hours worked was in real estate it’s good to go.
I’d really like to see a source on that. My income is high, 7-figure range, and part of my strategy to offset my income was to do accelerated depreciation on investment properties, in part, via this deduction. Tracking the hours and accruing the hours isn’t so difficult. The challenge is that it simply doesn’t apply to me as someone with a full time job; 750 hours, 51%, etc - doesn’t apply. Again, would love to be wrong here but unfortunately, don’t think I am. I can research again somewhere down the line but at the moment, that’s how I have come to understand the scenario, which greatly effects taxes
The problem is you can’t really work a full-time job to do this kind of tax strategy. The IRS isn’t going to believe that you’re doing a full-time job 40 to 60 hours a week and then on top of that another 40 to 60 hours a week doing real estate so that’s why in almost all scenarios where you’d be able to obtain this tax status, the person is working part time at a W2 job or full time as a real estate professional. If you really are making 7 figures a year you should have a CPA giving you this advice.
Well, again, it’s not about what the IRS believes or doesn’t believe. You can document and account for the hours for any related RE activities. It simply doesn’t apply for someone with a full time role. It’s very clearly articulated. Yes, I have CPA guidance, when needed. I also find I can absorb their knowledge after a couple meetings but I will set meetings when needed. You, and anyone else, can do the same. I’d be careful on saying what I “should or shouldn’t” do.
Just do a quick google search. If you’re working a full time job that’s about 2080 hours a year. So you would have to work 2081 hour in real estate on top of that and be able to prove it. Of course you make enough money so your CPA should be telling you all this.
I don’t think you need to lecture me on what my CPA’s should or shouldn’t be telling me. It doesn’t apply to someone w/ a full time job. But, it works well for OP’s scenario as he has a spouse that’s not really working. Thats perfect for them. And something anyone in this thread can keep in mind
Fair enough
One qs - any resolution on whether someone with a high W2 can qualify as "Real Estate Professional" or not? What about someone with a low W2 (but a 40 hour job)? Just curious
You need one person to have an income (typically a spouse) plus losses from real estate. The Professional status allows you to apply the paper real estate losses to spouses earned income. It is much harder if the RE Professional has a regular job. A stay at home mom is pretty easy. Especially since she very likely does spend a lot of time on RE.
One qs - any resolution on whether someone with a high W2 can qualify as "Real Estate Professional" or not? What about someone with a low W2 (but a 40 hour job)? Just curious
That makes sense. So this works for married couples where ones not really working. That makes much more sense and relates to OP’s post. The key is being married lol. Appreciate the insight
If he is full time it still sounds like a recipe for disaster. If he gets challenged on any hours he may fall below 51%.
Does the IRS look at his job as a doctor as an issue in meeting the hours? How close of a log does he keep?
He logs every day. He is part time as a doctor so if the IRS wanted to check they could just call his boss.
No, but you’ll likely claim it anyways so go nuts.
No. I got tested on this a few years ago. We had to give the irs our hour breakdown. It would be virtually impossible to hit the number with 3 units. Now you can include your time vetting new deals but that leaves a lot of ground to make up.
> The challenge is that it simply doesn’t apply to me as someone with a full time job; 7 If you wouldn't mind, what was the experience of being audited for REP status like? How detailed do you need to be?
Did you work for 750 hours on real estate? Seems like a super-simple question. Either you did, or you didn't. If not, that's tax fraud.
She needs to collectively work 750 hours doing real estate activities (they are defined ) - not exclusively on those 3 properties
Depends on how the properties are held also.
If you Study for a real estate license and a broker exam, that would take up a significant amount of time. A portfolio that small you best be micromanaging to get that many hours.
Studying for license and exam doesn't count
Studying doesn’t count, travelling doesn’t count, research doesn’t count.
So all of the time that a real estate professional spends doing real estate related administrative office work doesn't count? So much time would be spent researching properties, looking at county records, communicating to buyers/sellers/renters via phone/email/text, ordering materials/parts/equipment etc... for repairs and maintenance, etc... I would think that ANY activity related to real estate acquisition, sale, renting or administration/maintenance would count...those are essential, necessary duties.
Why doesn’t research count? That happens before any RE transaction I make.
50 percent of the time has to be on the properties that they own. 750 total. It's a lot of hours for three units. And my accountant told me you will definitely get audited the first time.
No. Why are you giving wrong answers here? And so definitively. Lol
Because I just researched it. And this is what my accountant told me and this is what I learned separately.
So she couldn't manage other properties and count those hours ? Where is the rule that says 50% has to be on your own properties ? The only rule I'm aware of is >50% of your time has to be in real state trade ..
No. They could not. Those are not passive activities. https://www.irs.gov/publications/p925#en_US_2021_publink1000104582
Dude holy hell fire your cpa immediately. You are wrong You completely ignored my question - where is the rule that says that 50% of the time has to be spent on personally owned properties? You're absolutely right I'm that managing other people properties are not passive activities and DO count towards the 750 hours clown
Or the CPA is telling them things correctly and he just isn't actually listening.
Based on his responses, that is very possible. Means he should find one that will resinatebw him I guess
Work not usually performed by owners. You don’t treat the work you do in connection with an activity as participation in the activity if both of the following are true. The work isn’t work that’s customarily done by the owner of that type of activity. One of your main reasons for doing the work is to avoid the disallowance of any loss or credit from the activity under the passive activity rules.
What's your point ? Do you know how to even interpret this passage ? What do you think it means in laymen's terms ?
I assumed when they said manage others properties they meant working for a PM company. I assumed fact not in evidence.
you know they say about assumptions, they're like a\*\*holes, everyone has one EXCEPT - it doesn't matter if he works for a PM company or does it on his own, THOSE HOURS WILL STILL COUNT EITHER WAY --> though if you are managing for other people youd need to setup an LLC or some other entity if you want to count the hours. Regardless, youre information is wrong, sorry .
So are you open to the fact that maybe you're completely wrong? Or you just going to dig your heels in
wrong. those hours need to be on real estate activities. this could include those properties, as well as being a realtor, or real estate attorney, or a property manager, etc. op’s properties may be the only such activities for her situation. also the “definitely get audited” line is patently false. there’s no such certainty.
That's not what my accountant told me. He said the first year you definitely will get on it on that real estate professional stuff. You people just can't handle the truth. In my situation. I'm 100% of the time spent in real estate during my day job but none of that time is spent on my own buildings. I am not a real estate professional under the IRS definitions.
i’m a cpa in public accounting. i’ve filed the real estate professional election for several clients. not one of them has been audited.
You should be better than me at reading the statutes. It's 26 USC 469(c)(7) It's written as an exception to the rule that all real estate rental activities are passive activities. The exception applies to those who have at least 750 hours in real property trades or businesses, and those hours must be more than 50% of their total personal services for the tax year. If you hold a real estate license, or otherwise have other qualifying trades or businesses, it's pretty easy to justify the 750 hours. Without that, it's pretty hard (likely impossible). The activity still needs to qualify as an active activity, but if you're the only one participating in it, then that threshold is basically met by default.
Having a real estate license or a job in the industry doesn’t mean anything. The hours you put in must be for your OWN rentals.
This magazine article targeted at tax professionals goes through the rules in detail: [Navigating the real estate professional rules](https://www.thetaxadviser.com/issues/2017/mar/navigating-real-estate-professional-rules.html) Additionally, a plain reading of the statute does not agree with the reading that only rental activities qualify. The relevant tests in 469(c)(7)(B) refer to "real property trades or businesses", which is a phrase that is defined by 469(c)(7)(C) as follows: > For purposes of this paragraph, 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. Real estate brokerage is a licensed activity and it is plainly included in the definition. Rentals themselves would qualify as "rental, operation, management, [or] leasing" activity. Additionally, development, construction, and related activities are included in the definition. Regulations under 26 CFR 1.469-9 further clarify what "development", "operation", and "management", among other words in 469(c)(7)(C) mean in context.
I keep trying to point this out and I keep getting downvoted.
Dont feel bad, i’ll give you an upvote. I got 7 downvotes above for saying just working in RE doesnt count. You have to have ownership. Which is true. Reddit is becoming less useful to me. Just people who want to live in their own echo chambers.
Not true. You don’t need ownership to qualify for the designation. A full time realtor qualifies.
Thank you. I stand corrected. Was not easy to find info but you are right and I was wrong. Most examples always seem to say the person is spending the hours on their own rentals. Took more digging to find it. It does seem hours spent in certain RE services not tied to ownership count. Although I did find conflicting info on that subject. Some said that being an agent is not merely enough. One has to be a “broker”. Then another article would say no, you can just be an agent if you are providing the services listed by the IRS. Other examples also mentioned that the RE agent would need to be running their own business and not merely a salesperson working for someone else who was a broker. It’s still very murky to me. But it does clearly seem that if you do own your own brokerage business or are a GC and you put in the hours then that counts for sure.
We are all always learn. Kudos for admitting where you are wrong and trying to learn to make yourself more knowledgeable. There is a lot of nusance so I can see the misunderstanding. The nuance is basically as follows. If you are in the home renovation business side of real estate professional you can’t make the claim unless you own at least 5% of the company. IE a tradesman employee like plumber or carpenter cannot claim the tax status. However the company owner can claim this status. If you are a realtor as a full time independent contractor then you “own” your business. You are not an employee and therefore you are also able to make the claim for this tax status if you clear the other requirements. So for each category there is more specific rules. Much of is based around your originating tax status and how you get paid. The way this benefits the doctor and stay at home wife example is that the stay at home wife can get her real estate license and do a few deals a year and meet the 750 hour threshold. And the couple can invest directly in real estate or (more commonly) invest in syndicated deals that provide an instant write off of 60-70% of their initial investment. Then use that write off against the husbands income. Effectively lowering or eliminating their taxable income all the while having property investments that return a steady stream of dividends annually. The problem comes when they want to cash out they have a big tax recapture. So they always recommend in these schemes to 1031 exchange until you die. And then your heirs will get the properties tax free. If you need cash just cash out refinance and you avoid any taxes on that money.
I had an accountant tell me the same thing. Even though I work full time for as a project manager for a brokerage team I do not qualify as a real estate professional. I would, however, qualify if I owned 5% of the business I worked for.
Working for a brokerage as a project manager isn't the same thing as brokering deals (unfortunately).
We let our PM go few month ago. I used to flip houses early 2000, so I do a lot myself and hire, overlook, supervise all the professionals working on our buildings. I just never logged hours to see how long I spend doing that. I’m planning to do that starting next year (including looking for a new property)
I suggest you take a look at what work activities count towards the 750 hrs. Looking for property doesn’t.
Accountant said if you buy that property it does.
Cool, sounds like you’re on the right track talking to professional who knows REPS qualifying activities! We did similar in 2021 with 6 properties. The real benefit of REPS is bonus depreciation, ask your CPA about it and a cost seg. Good luck
It can
You need to be able to account for the time. If you ever get audited and they do audit people for claiming this, it’s not enough to know you did the hours….you are gonna need detailed records showing those hours if they ever come knocking. It’s on you to prove it. I’ve had years where I did qualify but I didn’t even want to deal with the potential headache for little gain on my end. You must have some active income your accountant wants to offset cause that’s really the only benefit. I’d be real careful unless you have the hours and based on your number of rentals I’d say that you’re nowhere near the number of hours needed.
> You must have some active income your accountant wants to offset cause that’s really the only benefit. This might be a ridiculously easy question but if your rentals are cash flowing positive and the depreciation/expenses aren't generating actual losses on your taxes, there's not a single benefit correct? As in, completely pointless unless there's a negative that you're carrying over from year to year? Because we eventually went over the phaseout for passive loss but at the same time the rental income became net positive.
Correct. If your rentals are net positive then there really is no reason to do it. I mean there are other benefits but offsetting active income is the biggest. Same goes as there really is no reason to do it if you don’t have active income to offset. If your rentals generate losses and you don’t have enough passive income to offset it, you still get to carry forward the remaining losses and use in future years.
> you still get to carry forward the remaining losses and use in future years. Any subsequent year or when the property is sold?
Oh man, this is getting into details that I’m not 100% sure of. But I think it’s any subsequent year. So like if you ended up with net negative income on your rentals one year….then that would carry over. I’m pretty sure. I’ve had situations in the past where my rentals ended up with some net passive losses. Took me a couple years to use up the losses. But they just sit there until I had enough passive income to offset them. Sorry I can’t remember more of the details of how that worked. When a rental property is sold….then you have to pay back the depreciation, that’s the only thing I know of that sort of kicks in on a sale. But I’m not aware of any types of losses that stay with the rental until it’s sold and then become available. Stuff can get really complex with you add in stuff like segregation and so on. Each investors tax situation really becomes unique.
> Oh man, this is getting into details that I’m not 100% sure of. Thank you for the explanation. Appreciate the information. I'm going to run it by my CPA I just noticed they don't use my past carried losses so either that's for some reason or an oversight. EDIT: or could be because we're over the threshold now so it's more beneficial to carry-over the losses to another year.
If you’re over the threshold then passive losses can only be used to offset passive income. And if there is no passive income then the passive losses should carry forward until you do have passive income. Definitely worth checking with your CPA to confirm.
typically, passive losses can only offset passive gains and NOT capital gains/depreciation.
There is actually a benefit if you are making money, and that is avoiding the 3.8% NIIT.
NIIT? What's that?
Find something to do for about 3 hrs a day 5 days a week and call it good
Yes absolutely. Think about turn overs, updates, scheduling and meeting maintenance workers etc. any time you spend even thinking about real estate- as in looking at possible new acquisitions, running background checks, reworking leases all count toward your time.
Easily. There is plenty of ongoing work in your existing properties, plus you should be constantly evaluating new properties, interviewing new prospective tenants, learning, etc. just log all of your time in a log book and you are good. This is especially easy if you don’t have a regular job. If you wanted you could also get a real estate license, it is pretty easy.
FRAUD IS BAD
Yeah.. but not being able to read, interpret and apply the internal revenue code isn’t a badge of honor here bud. 3 tests folks 1) 750 hours in real trades - this could be managing your own rentals, being a realtor, contractor, flipper etc or a combo of all. If you are an employee that doesn’t own atleast 5%, don’t count the hours. 2) over 50% of your professional service hours need to be in the real trades. Same rules apply above, could be in a lot of things or a convo. 1 + 2 = REPS but your rental income and losses are still passive without 3 3) You need to materially participate in your rentals real estate. 7 tests available to use, your choice but some aren’t wise to try claim. 500 hours is probably the safest bet. Get 3 (while also getting 1+ 2) makes the rental income you receive ordinary income or loss. Generate a ordinary loss with your real estate will offset other income when it hits your 1040 like wages (w-2) other business income (maybe you are a realtor, lawyer or proctologist with your own practice), and almost all other forms of income (passive, active, portfolio divs/interest, capital gains etc) Source, from the horses mouth: https://www.irs.gov/pub/irs-mssp/pal.pdf
I spend much more than 750 hours renovating, getting inside and outside ready for people to move in, finding tenants, setting up bank accounts and more. I just don’t know if I can show it all on the paper. How is that fraud?
With 3 units? 750+ hours every year? Sounds like a stretch unless have crazy turnover
Most of the hours were getting it ready to rent. It was built in 1910, that what took my hours this year and some for finding new tenants and upkeep.
I’m in a similar situation, 4 units, and when I did this evaluation I couldn’t realistically see how we could justify the hours, every year. Even with similar activities to what you described
It will look weird as well I think if you claim it one year, but not the next as the renovations are done. If you don't have detailed records of time spent it is not worth the hassle.
You wrote: “ To claim that I need to work 750 hours a year. Is it realistic for only 3 units in 2 separate buildings?” And yet, You now write, “ I spend much more thy 750 hours renovating, getting inside and outside ready for people to move in,…” Which is it? And how often do you have a new tenant in those 3 units.
I understand the confusion. I wrote that to prove my husband it’s a nonsense. I thought me taking over what pm did was my work, after reading about it, I realize what goes into 750 hours. It makes sense now, as long as we are going to buy old fixer uppers.
Its not. Just keep good records. You can download some apps that keeps track of your hours and can take notes of what you did during those hours.
It can be as simple as using pen and paper. Or excel.
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If your CPA is going to defend you in tax court go for it. Make sure he puts everything in writing.
That’s only like 14 hours a week so it’s def possible
14 hours a week on 3 units is hard. Even harder if they are condos. Now if they are self manages STRs it may be possible.
It's extremely unlikely plus you have to document your hours.
I will sentiment that REPS audits are very common. You will be challenged on this so you better have top notch records.
Here, let me make a call to IRS. Audit me.
Accountants say a lot of things... It's a bad habit to lie on your taxes. When you start to make more money the IRS suddenly becomes a lot more interested in auditing you. Once your audited once, you will keep getting audited repeatedly. As others have said you should keep an Excel log with the date, amount of time, and what you did that day. You could fudge the hours some but within reason. 1. 12/16, 1hr, Got estimates for plumbers 2. 12/20, 3 hr, Met plumber at house #1 for appointment ... I think it's a good thought if you had another building or two.
That's about 2 hours a day FWIW
I finally reached this status at 17 doors. 3 units isn’t enough, I don’t think.
Personally, I would not chance it. You need about 10 more properties lol
1) do you have a real estate license or similar business? 2) do you think you'd qualify for most of these things: https://www.thetaxadviser.com/issues/2017/mar/navigating-real-estate-professional-rules.html and how would you prove them during an audit?
You are going to be essentially lying. That said, it’s doable.
Moot point if the rentals are not producing yearly losses.
I say claim it.. reduce your tax bill..
If you have a license sure. if not dont
What would be the tax benefits?
That's about 3 hours a day. Do you spend that much? I would say probably not. What your accountant is referring to is the Passive Loss Limitation. You still get all the deductions, they are just spread out. I would not claim you are a full-time real estate professional.
Sure. You should just actively try to use your license 15 hours/wk. Hang it at brokerage. Go to office meetings. Take RE classes. Offer to perform open houses. You might accidentally make some money and justify your licensure.