WHAT IS A REAL ESTATE PROFESSIONAL?

PART I OF II… I am posting this article because there is a difference in the income tax treatments given to a Real Estate Professional and an Investor. The difference between a Real Estate Professional and an Investor is HUGE!!! But there are still benefits to being “just” an investor. I told you that only a real estate professional can take an unlimited amount of loss from real estate holdings. That used to be true, but the phase-out of Bonus Depreciation changed that. There are very few things in the Internal Revenue Code that do not have some kind of limits. Here is the definition of a Real estate Professional. A REAL ESTATE PROFESSIONAL IS: An Individual Satisfies the Real Estate Professional Eligibility Requirements When Three Requirements Are Met 1. Rental real estate is owned. The individual must own at least one interest in rental real estate (§1.469–9(b)(6)). 2. The 50% test. More than 50% of the individual’s personal services during the tax year must be performed in real property trades or businesses (defined below) in which the individual materially participates (defined below). 3. The 750-hour test. The individual must perform more than 750 hours of service in those same trades or businesses (§469(c)(7)(B)). Tax practitioner planning. When considering the RE professional time tests, each spouse must be considered independently. Spouses’ time cannot be combined to determine if the RE professional tests are met. So basically, you have to own real estate, and I am not so certain about that (more about that to come), and 50% of your time and 750 hours must be spent on the real estate endeavors. If you have a full-time job and spend, as we all do, 2,000 hours in a year you CAN NOT qualify as a real estate professional unless that full-time job is in the real estate field. That means, that if you don't qualify as real estate professional your passive activity losses are limited to $25,000. Let’s take a deeper look into this. If you are a Real Estate Professional, then you can take a deduction on your income tax returns for Accelerated Depreciation and Bonus Depreciation up to the limits allowed by the Internal Revenue Code up to the current limit of $600,000, and that will go down on January 1, 2025, to $400K. That’s still one hell of a deduction, and it will create a net operating loss that can be carried forward to offset all your income for years to come until it’s used up. And that reduction goes down by 20% a year until 2027, when bonus depreciation is gone. But those limits may change. Call me if you have questions. If you would like more information, please contact me at (818) 298 – 4000 after 10 AM Pacific Time, and yes, that’s seven days a week. You can also send an email to me at [email protected] anytime, and I will try to get back to you in a timely manner.