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Unlocking the Benefits: How to Qualify for Real Estate Professional Status

Summary: This guide is dedicated to exploring the Real Estate Professional Status (REPS), a highly advantageous designation for those deeply involved in the real estate sector. Ideal for individuals aiming to leverage the tax benefits and other advantages associated with this status, this article provides an in-depth look at the IRS criteria, qualifying activities, and strategic approaches to ensure compliance and maximize benefits.

What Is Real Estate Professional Status? (REPS)

To understand this strategy, we must first realize there are two types of income. 

  1. Active - Think of wages, salaries, commissions, self employment income 

  2. Passive - Think rental income or royalties from that famous movie you were in

The IRS puts a limit on the amount of passive losses you can take against your active income. Most tax professionals know that you can deduct up to $25,000 in passive losses (from your rentals) against your ordinary income (wages) if you fall below a certain income level. The problem is that number is so low, those who qualify can't afford a home in CA, nor a rental on top of that. 

The easiest way around this rule for most is by using the Short Term Rental Loophole

But what if you don't want to fuss with the tenant turnover... there has to be a better way? 

REPS has a lot more stipulations than the STR loophole, but allows any type of rental income (including syndications) to be considered non-passive and offset your active income. 

Criteria for Qualifying as a Real Estate Professional

To qualify under REPS [IRC Sec. 469(c)(7)(B)] you must:

  • Spend more than 750 hours in the tax year in a real property trade or businesses 

  • These are classified as a 5% or greater owner in a real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage company.

  • AND more than half of your working hours in the tax year need to be spent in the above categories.

  • Also "materially participate" in each rental during the tax year unless you make the grouping election. Again the 3 most common tests are below.

  • Log 500 hours total or

  • Log 100 hours and more than anyone else or

  • Do substantially more than anyone else

If you just read that and are wondering how you are going to meet all of those tests while maintaining your current job, you've answered it already, you aren't going to be able to.

This method was intended for people who work in the real estate business full-time... or have a spouse that does 💡

Case Study: Maximizing Benefits with REPS

Donald is a successful realtor who has grown his rental portfolio over several years paying normal amounts of tax along the way. His rental portfolio is now worth $10M and a few units are almost paid off. Donald has $1M of active business income as a realtor.

To offset this, he does a standard 20% cash out refi on his portfolio (which is tax free...) and even though interest rates are at 8% it still makes sense because that is less than if he sold them and had to pay 40% in tax. With $2M from his cash out refi, Trump puts that as 20% down on a brand new $10M apartment complex.

Guess what, the new depreciation from that building is well over $1M which wipes out his active realtor income and depending on the state he lives in, nearly zero tax will be owed. 

The same rules apply to you and me so long as we meet all of the above criteria. Even if you don't want to be a realtor, all you need to be is actively involved in your rentals or a similar real estate trade or business. Once I figured this out, I went all in on real estate. 🏡🔨👷

Conclusion: Key Takeaways

  • Understand REPS: Grasp the differentiation between active and passive income and how REPS influences tax implications.

  • Meet the Hours: Aim to satisfy the 750-hour requirement with qualifying real estate activities.

  • Maintain Records: Keep detailed documentation of time spent in real estate pursuits.

  • Evaluate Feasibility: Consider your current employment and whether REPS criteria are achievable.

  • Leverage Case Studies: Learn from real-world examples to understand the potential benefits.

  • Plan Strategically: Align your real estate activities with REPS requirements for maximum advantage.

Maximize Your Real Estate Investments: Expert Insights from The CPA Realtor

Are you ready to unlock the full potential of Real Estate Professional Status and see how it can transform your financial landscape? I invite you to visit me at The CPA Realtor to discover how my expertise can help you navigate the complex world of real estate investments and tax benefits. My commitment is to provide you with personalized solutions that align perfectly with your unique goals. Connect with me today, and let's begin your journey to maximizing your real estate opportunities!

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