Stupid Little Things That Can Cost You Your Real Estate Professional Status

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If you have income over $100,000 and a real estate loss, then you’ve probably already discovered a tax problem. You can’t take a deduction for the real estate loss against your other income. That is, unless you are a real estate professional.

On Saturday, February 9th we’re going to have a FREE webinar on Updates to Real Estate Professional (REP) status. You can go to Http://www.DianesSeminars.comto register.  We will send a copy of the recording to everyone who registers. But you have to sign up now to get it.

One of the things we’re going to talk about will be the stupid little things that can cost you your real estate professional status.

#1:      The wrong business structure. If you’re a limited partner in an LP or a member that doesn’t manage an LLC, you only have three ways to prove material participation.  Remember there are three steps to getting the REP. First, you have to get the REP hours. Second, you have to have material participation. Third, you have to qualify individually for each property.

#2:      REP qualifying business.  There is a lot of confusion as to what qualifies for the real estate activities as a REP. (That’s the first step mentioned in the three above.)  For example, being a loan broker or real estate appraiser don’t work. Plus, you have to own 5% or more of the business.  We may see more changes coming, making this even tougher to prove in the future.   We’ll talk more about that during the webinar and take some live questions to set up strategies you can use to better prepare for changes coming.

#3.      Property manager problem.  The IRS appears to be targeting REPs who use property managers. The idea is that if you use a property manager than you aren’t spending enough hours. We’ll talk more about that when we go through the possible 7 ways you can get material participation. And we’ll also talk about a couple of them that could open you up to other new problems.

#4:      The 3rd step.  The third step is a doozy. You have to prove material participation with every property.  The easy, no brainer solution is to make an election to aggregate your properties. In fact, the IRS would love to help you make that aggregation election, even late.  But watch out. There is a downside to this. You may later lose your ability to immediately deduct losses when you sell.

Everything about real estate tax needs strategy today.  There are new surtaxes, higher capital gains rates and a much bigger audit risk.

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