Deducting Passive Losses as a Real Estate Professional

Maximizing Passive Losses as a Real Estate Professional

The benefits of qualifying as a real estate professional are that you can deduct passive losses in an unlimited amount and avoid the Net Investment Income Tax.

This significantly reduces a landlord’s tax bill.

In this article, we are going to review different case studies of how real estate investors deducted their passive losses as real estate professionals.

Real Estate Agent Qualifies for REPS and Materially Participates

Chris is a real estate agent and spends 1,200 hours representing clients in purchase and sale transactions.

As a result, Chris qualifies as a real estate professional for tax purposes.

Chris also has one rental property that produced a $10,000 loss that Chris cannot utilize because he earned over $150,000 during the year.

Qualifying as a real estate professional is only step #1 for Chris as he must also demonstrate that he materially participated in his rental activity.

Luckily, Chris maintains great records and was able to prove he materially participated in his rental activity because he spent 500 hours managing the rental, it’s contractors and the rehab.

As a result, Chris can deduct the $10,000 passive loss against his ordinary income.

It’s important to note that you must keep contemporaneous records and those records need to be absolutely bulletproof to substantiate your real estate professional status claim.

Full-Time Financial Advisor and REPS Spouse

Robert works as a full-time financial advisor and operates as a sole proprietor.

His wife, Lisa, was a homemaker until recently when she began to focus more in real estate.

When they came to us for advisory services, they had a six-figure tax liability.

We helped Robert and Lisa mitigate that tax liability by supporting Lisa in qualifying for Real Estate Professional Status.

This helped them use the losses from their cost segregation studies to eliminate rental income and all their business income that year and the following year.

This resulted in about $180,000 across two tax years.

We also were able to provide additional tax savings for Robert’s financial advisor business using his S-Corporation which reduced his tax liability even further.

Doctor Utilizes REPS to Deduct Passive Losses

Rachel was a successful doctor and her husband was transitioning into a full-time investor.

Through our guidance, he gained confidence and clarity that qualifying as a real estate professional was within reach and transitioned into a successful full-time investor and agent.

After acquiring and managing several rental properties they were about to generate over $315,000 in rental losses from their properties, take an IRA distribution of over $50,000 to fund acquisitions, and still reduce their tax liability by over $62,000 from the following year.

Cost Segregation Studies and REPS

Josh started off his career in sales and not much later left that career to pursue his passion for real estate full-time.

He wanted to grow his long-term rental portfolio of multi-family units.

Our advisory team helped build a plan for Josh to achieve material participation and subsequently Real Estate Professional Status as well as take advantage of the benefits of cost segregation studies to offset his wife’s W2 income and a large withdrawal from his retirement account.

Josh is now in a great position to reach properties with a larger number of units per building over the next several years and continue to offset most of his wife’s W2 income.

The Advantages of Deducting Passive Losses

Reach out to us for help achieving REPS.