I recently reviewed the past tax returns of a prospective client. It was obvious from the questions and topics he wanted to discuss that he suspected something was wrong with his tax return, but he wasn’t sure exactly what it was.
I was shocked to discover that his returns didn’t show the biggest tax advantage he had. He was clearly a real estate professional.
If you or your spouse is a real estate professional and you’re paying tax, one of two things is wrong. #1: You don’t own enough real estate. #2: Your tax advisor isn’t taking all of the deductions that are available to you.
There are two things to clear up right away. Let’s start with what it means to be a real estate professional.
I have a whole Home Study Course on this, so what follows is obviously an abbreviated version.
There are 3 tests to pass to be a real estate professional (REP). If you’re married and file jointly either you or your spouse can be the REP If you’re married and file separately, neither of you can be a REP, no matter what the other circumstances are. If you’re single, it has to be you.
Test #1: You (or your spouse, if married filing jointly) must have 750 or more hours of real estate activities AND more hours in real estate activities than any other business or trade.
Test #2: You AND your spouse (if applicable) materially participate in the property. There are 3 possible ways you can do that. A couple of different ways between this and the prior test. In the test of real estate activities it may include work you’ve done with your property, but it doesn’t need to. Also, you or your spouse must pass alone. For the second test, you and your spouse can add your hours and it’s related only to the property.
Test #3: Each property must stand alone. You can file an aggregation election on your return, but there could be a potential downside to that when you sell.
NOW that you’re sure you will qualify with the REP status on your return, the next step is to look at your depreciation strategy. Depreciation is a rare deduction. You can turn it on. You can turn it off. You can catch it up. You can accelerate it. In most cases, once you have REP status, you’ll want to accelerate it so that you have more real estate loss to offset your other income.
Of course, all of this needs strategy. You need a strategy to make sure you’re in compliance with the REP rules. You need a strategy for your depreciation. And now, with the new pass-through threshold income reduction, you need a strategy to make sure you can take advantage of this 20% reduction.
For more information on a personal consultation where we take a look at what will work best for YOU and your personal circumstances, please go to https://www.ustaxaid.com/consultation/.
I offer only 4 consultation spots per month, so don’t wait. They often go by the middle of the month.