There are significant tax benefits for investors who can qualify with the IRS for real estate professional status. Of course, these benefits do not come without trade-offs and a necessity for careful planning. To qualify as a Real Estate Professional for tax purposes, a taxpayer must meet a two-part test. To read more information regarding IRS investor classifications click here:

The following example is a fact pattern I recently came across with a client that illustrates the power of incorporating this strategy into a tax plan.

Case Study

Consider a married couple with one individual that works a full-time job, receiving a W-2, making $225,000 per year while their spouse is a stay at home parent. This couple strategically purchases rental properties which the stay at home spouse manages. While designing their rental portfolio and business plan, the couple strategically structured the activities to meet the real estate professional qualifications outlined in previous articles.

The stay at home parent is now considered a Real Estate Professional. If this individual spends more than 750 hours actively involved in their rentals, they can use the excess losses on the rentals to offset the W-2 income without limitations.

There are negative implications to achieving the IRS status of real estate professional and the associated tax benefit. If you are considered a Real Estate Professional, the IRS considers your short-term gains and income as ordinary income.  This income will be subject to self-employment tax; more on mitigating this issue here:

Tax benefits and incentives should not drive overall investment portfolios and strategies.  Reach out to our team regarding any questions about the Real Estate Professional Status or establishing a first-rate comprehensive tax strategy that is tailored to your real estate portfolio.

Camuso CPA PLLC’s focus and specialization delivers a unique perspective on best industry practices to provide the most value to clients.  Contact us today for financial and tax planning and get your finances in order: