Are you a real estate investor who owns multiple properties? Are you interested in claiming real estate professional status? If so, you’ve come to the right place.
At Creative Advising, we are certified public accountants, tax strategists, and professional bookkeepers who specialize in helping real estate investors understand their tax obligations. We understand that real estate investors have unique needs when it comes to their tax strategies, and we’re here to help.
In this article, we’ll discuss the qualifications for real estate professional status, the benefits of claiming it, and the steps you need to take to make sure you’re in compliance with the IRS. We’ll also discuss the potential pitfalls of claiming real estate professional status, and how to avoid them.
Real estate professional status can be a great way to reduce your tax burden and maximize your profits. But it’s important to understand the qualifications and the process before you take the plunge. With the right information and the right strategy, you can make sure you’re getting the most out of your real estate investments.
At Creative Advising, we’re here to help you make the most of your real estate investments. Read on to learn more about the qualifications and benefits of claiming real estate professional status, and how to do it the right way.
Qualifying for Real Estate Professional Status
At Creative Advising, we often help our clients explore ways to optimize their tax strategies through professional qualifications like Real Estate Professional status. Real Estate Professional status can provide substantial tax savings for individuals who own and actively manage rental real estate properties.
First and foremost, to qualify for Real Estate Professional status a taxpayer must spend more than 50% of their working time in real estate activities and materially participate in such activities. This means taxpayers must devote more hours to managing their rental real estate business than to any other business. This includes time spent on obtaining rental properties, managing the properties, and other activities related to the rental properties. Additionally, a taxpayer that meets this criterion must also meet the financial thresholds that require the taxpayer to be involved in certain minimum amounts of rental activity.
Can I claim real estate professional status if I own multiple properties? Yes, but it requires that you meet both the time and financial thresholds. Rental real estate activities are considered material participation even if these activities are divided among several properties. But if your primary goal is solely to build a portfolio of rental properties, then it is likely that it would not qualify as real estate professional status. In this case, the rental property activity must be undertaken in a tax-favorable manner rather than for the purpose of qualifying for real estate professional status.
Tax Benefits of Real Estate Professional Status
When you reach Real Estate Professional Status, you are able to pass through your rental property income and expenses directly to your shareholders or members and avoid double taxation at the corporate level. This means that your corporate earnings get taxed only once. This status could lower your tax burden significantly.
Real Estate Professional Status also means that you can take advantage of the Section 199 deduction, which could reduce your taxable income up to 20%. As well, with Real Estate Professional Status, you can qualify to deduct up to $25,000 of your before-tax losses incurred from the rental real estate activities.
Can I claim real estate professional status if I own multiple properties?Yes, you can claim Real Estate Professional Status if you own multiple properties. To qualify as a real estate professional, you must meet certain requirements including spending more than 50% of your working hours and 750 hours per year in real estate services and having significantly more rental real estate income/expense than any other activity you are involved in. If you meet these requirements, you can qualify for this status. However, it is important to note that you may still need to meet other criteria in order to qualify, so it is important to consult a tax professional to ensure you properly understand the requirements.
Determining and Calculating Rental Real Estate Activity
As Tom Wheelwright often advises, understanding the tax rules regarding real estate professional status is key to significantly reducing tax liabilities for rental property owners. A major part of this is the determination and calculation of your rental real estate activity. For a taxpayer to qualify as a real estate professional, they must actively manage multiple property. This means the taxpayer devotes substantially all of his or her time and energy to rental real estate activities and the time spent owning and managing the property is not merely incidental. The IRS requires that 750 hours a year, or more, for each property must be devoted to rental real estate activity in order to qualify for real estate professional status.
When determining and calculating the hours spent on rental real estate activity, you must include all activities related to the rental real estate such as repairing, maintaining, acquiring, selling, managing, and financing the rental property. What is considered “substantial all” of a taxpayers time and energy can vary from taxpayer to taxpayer depending on the individual’s factors such as the size and complexity of the rental estate business or the amount of time that a taxpayer devotes to non-rental real estate activities.
There are numerous tax benefits for taxpayers who qualify as real estate professionals, such as claiming losses against ordinary income. It is important to track and document all hours devoted to each property in order to prove real estate professional status to the IRS.
Can I claim real estate professional status if I own multiple properties? Yes, but it is important to understand that in order to claim real estate professional status, the taxpayer must devote substantially all of their time and energy to rental real estate activities. This means the taxpayer must satisfy a 750-hour time requirement for each property they own or manage in order to be eligible for real estate professional status. Furthermore, keep thorough documentation of your rental activities throughout the year.
Record Keeping and Documentation Requirements
When considering whether to claim real estate professional status, one of the most important considerations should be whether you can meet the record keeping and documentation requirements necessary to maintain the status. Real estate professional status requires you to maintain a meticulous paper trail to successfully back up your claim on a tax return. The IRS specifically requires that you document the following for each rental property:
• Sufficient records of all rental related income and expenses
• A separate bank account for rental activities that is used solely for those activities
• Detailed records of any improvements or repairs, justified by documents such as invoices, bills, and receipts
• Copies of all rental agreements
• Detailed records of all rental-related travel, repairs, and services
• Detailed records of any assets purchased for repairs or improvements
Can I claim real estate professional status if I own multiple properties? Real estate professional status does not require an unlimited number of properties to be owned, but it is necessary that the amount of time spent on rental activities be substantial. The time spent on rental activities should occupy a greater portion of the taxpayer’s overall time relative to any other source of income. Additionally, all rental related income and expenses should be segregated from any other trades or businesses operated. Thus, a taxpayer might be able to qualify for real estate professional status if they spend the requisite amount of time managing multiple properties. If the taxpayer rents residential, commercial, or industrial properties, the income and expenses generated by those rentals can all be combined to calculate the profitable hours devoted to real estate professional status. However, the rentals must all be coded pursuant to the taxpayer’s activities to label them correctly. Professional advice can ensure that everything is coded correctly and that all records are being maintained according to the IRS’s rules and regulations, creating the strongest possible case for real estate professional status.
Potential Pitfalls of Claiming Real Estate Professional Status
There can be downsides to claiming real estate professional status. The main concern with claiming this status is it makes you more likely to be audited since this requires closer scrutiny from the IRS. Furthermore, if you own multiple properties, this status requires that more than half of your total time be spent in real estate business activities for you to qualify. It could be very difficult to prove to the IRS this requirement is met, so you need to make sure it is feasible to meet it before you set out and commit to being a real estate professional.
Another potential pitfall to consider is that real estate professional status can be very time-consuming. You may find it necessary to place a heavier emphasis on research or training or analysis of the markets and industry trends to stay up to date. You must also make sure that all your income and expenses are accurately reported on the appropriate return and that you maintain all the proper records that are required.
Can I claim real estate professional status if I own multiple properties? Yes, but it is important to remember that in order to claim this status, you must hide more than half of your total time to real estate business activities. Being a real estate professional can be very rewarding and beneficial, but it is also important to be aware of the potential pitfalls and to make sure you meet all the criteria before you commit to real estate professional status.
“The information provided in this article should not be considered as professional tax advice. It is intended for informational purposes only and should not be relied upon as a substitute for consulting with a qualified tax professional or conducting thorough research on the latest tax laws and regulations applicable to your specific circumstances.
Furthermore, due to the dynamic nature of tax-related topics, the information presented in this article may not reflect the most current tax laws, rulings, or interpretations. It is always recommended to verify any tax-related information with official government sources or seek advice from a qualified tax professional before making any decisions or taking action.
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Please consult with a qualified tax professional or relevant authorities for specific advice tailored to your individual circumstances and to ensure compliance with the most current tax laws and regulations in your jurisdiction.”