Real Estate Professional Status Designation

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Topic Author
arsenalfan
Posts: 1132
Joined: Sun Dec 08, 2013 11:26 pm

Real Estate Professional Status Designation

Post by arsenalfan »

Anyone here have Real Estate Professional (REP) status and willing to do an Ask Me Anything?

Looking at this blog post
https://semiretiredmd.com/primer-real-e ... fessional/

We have a portfolio of rentals that I actively manage, and I'm a 0.6 FTE MD.

For the RE, 14 properties, and I manage the 7 that are local. Willing to acquire one property per year also, 25% down renovate/rent/hold and build portfolio. Also have a great GC-in-traiing who just needs the business/accounting assistance, and thought about working alongside him to get RE development jobs (doctors renovating their offices, etc).

Considering getting my realtor license, and doing 51% RE and 49% W2 or 1099 physician work (at 25 hours per week now, just need to go to 20 and can afford that decrease in salary). It would be more of a hobby/job - have already supervised 7 renovations with same GC, done 1 flip, have the local bank connections, etc. It's just something fun and stimulating to do. Shiftwork physician work is fun for me at 25 hours; I have no interest in working more than that in medicine (unless travel is involved once kids in college).

I can easily document the 750 hrs and work time for REP (already track MD work hours, and already have separate email/accounts/calendar for properties). I guess questions are:

1. Is it hard to find an accountant familiar with this?
2. Downsides to plan I'm missing?
mogg
Posts: 132
Joined: Mon Aug 22, 2016 9:33 pm

Re: Real Estate Professional Status Designation

Post by mogg »

No downsides, the big requirement is the hours which sounds like you have satisfied. Since you are already 51%, you don't really need a real estate license, though having one will help maintain 51% and make it easier for you to acquire properties.

Standard tax software (e.g. turbotax) is sufficient, it's basically a checkbox - do you have real estate professional status or not?
pshonore
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Re: Real Estate Professional Status Designation

Post by pshonore »

In most states, a RE licensee has to work under the supervision of a Broker with whom commissions are usually split. Of course getting half of the selling or listing commission is better than not being licensed and getting zero. Requirements for a Brokers license are experience as a licensee (probably 2 years or more) and additional classes.
J295
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Re: Real Estate Professional Status Designation

Post by J295 »

OP. What tax benefits results from this designation which are not currently available to you without it?
toocold
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Re: Real Estate Professional Status Designation

Post by toocold »

J295 wrote: Thu Oct 15, 2020 2:53 pm OP. What tax benefits results from this designation which are not currently available to you without it?
I believe you can offset your 1099 incomes with potential losses in real estate. If you don't have this, it is considered passive income, and is a separate category from earned or portfolio income.
Topic Author
arsenalfan
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Joined: Sun Dec 08, 2013 11:26 pm

Re: Real Estate Professional Status Designation

Post by arsenalfan »

toocold wrote: Thu Oct 15, 2020 3:21 pm
J295 wrote: Thu Oct 15, 2020 2:53 pm OP. What tax benefits results from this designation which are not currently available to you without it?
I believe you can offset your 1099 incomes with potential losses in real estate. If you don't have this, it is considered passive income, and is a separate category from earned or portfolio income.
Yup
Check the link in my original post
J295
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Re: Real Estate Professional Status Designation

Post by J295 »

arsenalfan wrote: Thu Oct 15, 2020 4:10 pm
toocold wrote: Thu Oct 15, 2020 3:21 pm
J295 wrote: Thu Oct 15, 2020 2:53 pm OP. What tax benefits results from this designation which are not currently available to you without it?
I believe you can offset your 1099 incomes with potential losses in real estate. If you don't have this, it is considered passive income, and is a separate category from earned or portfolio income.
Yup
Check the link in my original post
Right, I understand that, but what I meant to ask is right now in your current situation are there "tax losses" from your real estate ownership that you have that you are not able to utilize? I suppose the answer is yes or you wouldn't be exploring this option (which takes a bit of "work" for the average Joe to fit into the box). Thanks.
ScaledWheel
Posts: 283
Joined: Sat Jul 23, 2011 8:06 pm

Re: Real Estate Professional Status Designation

Post by ScaledWheel »

J295 wrote: Thu Oct 15, 2020 4:18 pm Right, I understand that, but what I meant to ask is right now in your current situation are there "tax losses" from your real estate ownership that you have that you are not able to utilize? I suppose the answer is yes or you wouldn't be exploring this option (which takes a bit of "work" for the average Joe to fit into the box). Thanks.
It sounds like OP is planning on buying a property about every year, in which case from my understanding they can deduct any renovation costs instead of putting them on a depreciation schedule. If that's true then I see it being a huge benefit, though not sure if and how it affects depreciation recapture.
Topic Author
arsenalfan
Posts: 1132
Joined: Sun Dec 08, 2013 11:26 pm

Re: Real Estate Professional Status Designation

Post by arsenalfan »

J295 wrote: Thu Oct 15, 2020 4:18 pm
arsenalfan wrote: Thu Oct 15, 2020 4:10 pm
toocold wrote: Thu Oct 15, 2020 3:21 pm
J295 wrote: Thu Oct 15, 2020 2:53 pm OP. What tax benefits results from this designation which are not currently available to you without it?
I believe you can offset your 1099 incomes with potential losses in real estate. If you don't have this, it is considered passive income, and is a separate category from earned or portfolio income.
Yup
Check the link in my original post
Right, I understand that, but what I meant to ask is right now in your current situation are there "tax losses" from your real estate ownership that you have that you are not able to utilize? I suppose the answer is yes or you wouldn't be exploring this option (which takes a bit of "work" for the average Joe to fit into the box). Thanks.
Thanks, you made me dive deeper in to my tax returns.

How do I generate RE losses on paper of $250k per year?

The 14 rentals generate only 25k in losses per annum. REP status makes those active, saving me net 9-10k in taxes (top bracket). Ok that doesn't really move the needle.

Basically I'd have to really commit to doing RE each year. Typical buy is $385k property, 25% down, 50k renovation. If I could write off that 50k immediately, that's pretty good I suppose (save 20k net if top 39% tax tier).

So answering my own question: buy 4-5 of those per year, generate 250k loss, offset entirely my 250k w2 income.

Interesting...
Last edited by arsenalfan on Thu Oct 15, 2020 6:49 pm, edited 1 time in total.
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unclescrooge
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Re: Real Estate Professional Status Designation

Post by unclescrooge »

ScaledWheel wrote: Thu Oct 15, 2020 5:06 pm
J295 wrote: Thu Oct 15, 2020 4:18 pm Right, I understand that, but what I meant to ask is right now in your current situation are there "tax losses" from your real estate ownership that you have that you are not able to utilize? I suppose the answer is yes or you wouldn't be exploring this option (which takes a bit of "work" for the average Joe to fit into the box). Thanks.
It sounds like OP is planning on buying a property about every year, in which case from my understanding they can deduct any renovation costs instead of putting them on a depreciation schedule. If that's true then I see it being a huge benefit, though not sure if and how it affects depreciation recapture.
Recapture is a flat 25%. If your marginal tax bracket is higher than 25%, you come out ahead.
Or you can pass it to your heirs at death with a stepped up basis and come out far, far ahead!
mogg
Posts: 132
Joined: Mon Aug 22, 2016 9:33 pm

Re: Real Estate Professional Status Designation

Post by mogg »

unclescrooge wrote: Thu Oct 15, 2020 6:44 pm
ScaledWheel wrote: Thu Oct 15, 2020 5:06 pm
J295 wrote: Thu Oct 15, 2020 4:18 pm Right, I understand that, but what I meant to ask is right now in your current situation are there "tax losses" from your real estate ownership that you have that you are not able to utilize? I suppose the answer is yes or you wouldn't be exploring this option (which takes a bit of "work" for the average Joe to fit into the box). Thanks.
It sounds like OP is planning on buying a property about every year, in which case from my understanding they can deduct any renovation costs instead of putting them on a depreciation schedule. If that's true then I see it being a huge benefit, though not sure if and how it affects depreciation recapture.
Recapture is a flat 25%. If your marginal tax bracket is higher than 25%, you come out ahead.
Or you can pass it to your heirs at death with a stepped up basis and come out far, far ahead!
Yes, excellent plan! Depreciate the rentals to $0, and then give your heirs a step up.
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