We continue to get a lot of questions about real estate professional status. If you have a question, please go to https://www.ustaxaid.com/got-a-tax-question/ to find out how you can get an answer.
Here is a question we recently received:
1. – For tax purpose, if we file the LLC as a business, not a single member entity, in order to be considered RE professional, do each of us need to get the professional status with 750 hours of RE, or only 1 of us? (My husband has a full time job as Professional Civil Engineer. )
2. – If I and my Husband want to file joint tax return with flow-through taxation for the LLC, how do they consider my Husband’s income from the LLC if he’s not a R.E. Professional? (Currently we’re filing tax returns under his name, since I’m a homemaker.)
3. – How will this LLC Partnership affect our daughter’s tax return, who also has a full time job?
4. – Finally, how bad it would be for us, if we file the LLC just 2 of us, as husband & wife – which would be a “single member” LLC in CA?”
Let’s start with the question of the LLC (limited liability company). You live in a community property state, which means a married couple is considered a single member entity. You can jump through some hoops and turn it into another type of structure (S Corporation, Partnership, C Corporation), but the default will be either to report on Schedule C if it’s an active business or Schedule E if you’re holding real estate as an investment.
I’m guessing from what you wrote that you have some real estate rentals. Those would report on a Schedule E, as part of your Form 1040.
There are three tests for the Real Estate Professional status. Please see yesterday’s blog entry with more detail on these.
For you, I would have one additional concern. You mentioned that your husband worked as a Civil Engineer. Typically, this would be a real estate activity, but ONLY if he owns part of the company. If he’s just an employee, the hours spent as an engineer do not count toward Real Estate Professional status.
It sounded like you might be trying to combine your hours together. You can not do that, only one of you needs to qualify with the 750 hours/more hours than any other business test, but ONLY one of you CAN qualify. You can’t combine hours.
Please note the comments yesterday about the LLC. You want to have a manager-managed LLC with the real estate professional named as the manager.