A common misconception is that you must be a realtor to file as a real estate professional on your tax return. That’s not true. As long as you meet the specific criteria and keep diligent records you may be able to file as one yourself!
When you're a Real Estate Professional, you can take rental losses the same year that they occur and effectively offset other taxable income. This is different from the average person who carries these losses over year after year. As a real estate professional, you can use these losses to drive down taxable income from other sources each year. The tax effects is often quite significant!
The requirements simply are:
materially participate in your rental operation (meaning you don't just sit back and collect a check while someone else runs everything.)
spend more than half of the personal services you perform within real estate
meet the annual minimum hourly requirement of 750 hours. (this is the big one and requires tracking.)
Being a real estate professional requires diligent, contemporaneously tracked records of activities to show proof that you've attained the hourly requirement. Things like market research, planning, and ensuring each place is furnished & stocked nicely for guests are all included in the time requirement. Conversations with your tax professional, the housekeeper, repair people, and others involving planning for real estate endeavors all count. You’ll be sure not to forget the time you’ve spent at the properties doing basic repairs and sprucing them up a bit. For tracking, a simple spreadsheet showing dates, hours, notes on what you did, and mileage if applicable.
Travel Expense for Property Investments
The time spent traveling to a place to make sure it’s a good purchased becomes counted when you seal the deal on that new piece of property bringing it into your growing rental empire! This can include the travel expenses occurring over the course of multiple years until the purchase is made. You will need to keep diligent record to take advantage of this.
How Depreciation Works
Depreciation is an expense taken each year to help offset rental income. It's based on what you paid for the property along with any major improvements that were needed. The depreciation expense often times helps reduce a rental property to a no income situation. Which is great!!!! Until you sell.
When rental real estate property is sold by the original owner the depreciation that has occurred over prior years is "recaptured" as ordinary income required by the IRS. So, taking that nice chunk for depreciation expense each year was great, but not so pleasant when the property is sold, and Uncle Sam has his hand out wanting it back! Ouch.
Not so fast, Sam! INHERITED RENTAL PROPERTY
When heirs inherit a rental property, they receive a step-up in basis equal to what the property is worth at fair market value at the date of death of the person from whom the property is being acquired. This effectively allows them to sell the property without having to pay the depreciation recapture! That’s a big deal for real estate professionals who are actively taking their passive activity loss each year. The step-up in basis rules is outlined by Publication 551, and provided for your knowledge & entertainment HERE.
Retire as a Real Estate Professional
Being a real estate professional in retirement becomes much easier once you’ve amassed a handful of rentals through the years. You’ll likely not have active earnings (by way of a job) so the over 50% requirement is much easier to obtain. And what’s better to do with all that free time than to track the 750 hours that you spend each year anyway owning & operating your rentals. Now is the time to learn more about filing this classification and its' requirements because you don't want to pay more than your fair share!
Is now the time to take that nest egg and invest in a rental or two for yourself, or already have a handful with questions?
To learn more, please schedule a paid consultation with me below so we can explore the benefits and if it makes sense for you.
Book a New Client Appointment
See if Rangeview Tax & Accounting is a good fit for you! We offer in-person, on-site, and telephone chats. We require a $75 deposit that is applied to future services when you come onboard to RANGEVIEW!
Book a Paid Consultation
Our paid consultation is $100 for 30minutes and puts you on the line with a tax professional who will answer questions that you have related to IRS Code, and Tax Strategies. Pay for your consultation, select one of the available appointments, and provide the general topic of discussion or questions that you wish to discuss.
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