Qualify as a Real Estate Professional and Save Thousands
Chris Barrett
Introduction
Real estate professional status, commonly referred to as REPS, is a powerful tax planning strategy that can often result in thousands of dollars in savings for real estate investors. However, it is a very complicated and closely monitored portion of the tax code, so you need to be careful. Avoid taking shortcuts that may result in missing out on significant savings.
In this article I am going to give you an overview of the steps involved to qualify for real estate professional status as well as the ways it is used to save real estate professionals thousands on their tax bill.
So what is it, and how can it save you money?
Real estate professional status is a tax designation that allows a taxpayer who manages rental real estate to treat their rental activities as non-passive.
This is beneficial because if you can generate paper losses on your rental activities using depreciation then you can use those losses to offset other non-passive income such as the income from your W2 job or business.
Someone without real estate professional status would have those losses suspended until they became usable at a later time.
What do I need to do to qualify for REPS?
To qualify for real estate professional status, you need to pass all 3 of the below tests:
1: 50% Test
To pass this test you must spend at least 50% of your working time working in a real property trade or business. There are 11 real property trades/businesses that qualify. They include the following real property trades/businesses:
- Development
- Redevelopment
- Construction
- Reconstruction
- Acquisition
- Conversion
- Rental
- Operations
- Management
- Leasing
- Brokerage
2: 750 Hours Test
To pass this test at least 750 hours of your working time must be spent in one of the above activities.
3: Material participation
The final test to achieve real estate professional status is material participation. There are seven ways that you can pass this test. The seven ways are listed below. The ones most commonly used to meet REPS are one of the first 4.
- The taxpayer must work 500 hours or more during the year on the activity.
- The taxpayer does substantially all of the work in the activity.
- The taxpayer works more than 100 hours in the activity and no one else works more.
- The activity is a significant participation activity (SPA). The total of all hours worked in SPAs with 100-500 hours exceeds 500 hours for the year.
- The taxpayer materially participates in any 5 of the last 10 years.
- The activity is a personal service activity and the taxpayer materially participated in any 3 prior years.
- The taxpayer participates on a regular, continuous, and substantial basis during the year. This applies if they also meet the 100-hour test, no one else worked more hours, and there was no property manager hired.
How do I prove it?
It is very important that if you were to be audited that you can prove that you passed all three of these tests. Your evidence should be comprehensive and convincing. With such huge savings on the line, it is not the time to take shortcuts.
One of the most important pieces of evidence you should have is an accurate and detailed time log. This log at a minimum should contain…
- The date
- Start and end time for each entry
- A detailed description of the activity
- A way to verify each entry
Use a CPA Specialized in Real Estate
The REPS strategy can generate significant tax savings, but there are numerous nuances that must be navigated properly. With so much on the line it is worth it to have a professional walk down the path with you.
Midwest CPA is a firm the specializes in helping investors implement real estate tax strategies just like this to save thousands of dollars.
Get started today with a free consultation and stop overpaying on your tax bill.
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Disclaimer
The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting, or investment advice. You should consult a qualified legal or tax professional regarding your specific situation.