Real Estate professional status and income offset

[Michael Win]

Hi Bigger Pocket

https://semiretiredmd.com/primer-real-estate-professional/

I just read this site and it appears to something very beneficial to me.

Background - I am a doctor who makes over 500K(1099) clinically and over 500K( K1) as part owner of the business for the past 3 years. Income taxes are a heavy burden. My wife (homemaker) and I have 8 rental properties. 3 STR and 3 LTR with property manager and 2 MTR that she manages. All major renovations, looking for deals, meetings with contractors, setting up the furnished MTRs, Advertising/answering questions for MTRs are done by my wife.

Real estate professional Status (REPS) requirements are all met by my wife for the past 2 yrs. 

1. 1. Perform more than 50% of services in real property trades or businesses (“50% test”), and
2. 2. Perform more than 750 hours of service in real property trades or businesses (“750 hours test”), and
3. 3. Materially participate in each rental activity (“material participation test”).

I would say we have about 4-5M in asset depreciation that we typically take over 27 yrs per our CPA thus we do not pay tax on rental income/profit.

Could We

1. Use her REPs status and real estate depreciation/loss to offset my 1M/yr income for the next 4-5 yrs thus paying no income tax on my business/clinical income?

2. Can I offset my business K1 and Clinical 1099 income?

3. Do I need to have a professional calculate my segregation cost to set my depreciation basis

4. What else do I need to do to justify this for the IRS? Do I need to form an LLC with her name on it? Would keeping a google calendar with dates/hours/time worked to satisfy the 750 hrs be adequate? Do I need to set her up with a Business Credit card under her/business entity to satisfy the IRC? Currently we just run everything through our personal email and personal credit card.

If we are able to do this, and offset all of my work/business income, this would free up 4-500K/yr to buy more properties rather than paying income tax.  Does anyone have a cost segregator (if needed) or CPA that specializes in this from Austin TX to walk me through the process?

Thanks Mike

[Michael Plaks]

@Michael Win

There should be a warning for doctors printed in bold, all caps somewhere: "stop freaking reading online crap about paying zero taxes!" You guys are among the smartest people in the world. You roll your eyes when your patients come to you with their "online research." Yet the allure of the mythical high income but tax-free life is so strong that you suppress your common sense.

Ok, rant over. Now let's discuss the situation.

1. Your wife can likely qualify for the REPS status, based on your description. It just needs to be carefully verified, because things are not as simple as they may sound to you. "Material participation" is tricky, for instance. 

2. If she qualifies, then her REPS status applies to both of you. It will allow you to use losses from real estate against any of your other income, including W2 and K1.

3. Losses can be increased by cost segregation, however cost segregation loss is only for one year and cannot be repeated for the same property. For more details, read this post: https://www.biggerpockets.com/forums/51/topics/1075919-five-common-myths-of-cost-segregation-and-100-bonus-depreciation

4. STRs have different rules and are not part of the REPS strategy, but still allow losses in most situations.

5. There is no way on earth that you can offset your entire $1MM+ income this way. Partial offset - yes, but you cannot offset all of it, especially not year after year.

6. You really need a long-term tax strategy. It's a long one-on-one conversation with a tax planner/accountant experienced in real estate and overall tax planning.

Now to the professionals. Your CPA should guide you through this. If they are not able to, you need an upgrade, and here is the BiggerPockets directory: https://www.biggerpockets.com/...   None of us are in Austin, but local is not necessary.

Cost segregation can be done by one of the national companies. Reach out to these cost segregation experts: @Yonah Weiss, @Bernard Reisz, @Julio Gonzalez (in no specific order)