Becoming a Real Estate Professional with W2 Income: Need Your Advice!!

[Japnik Singh]

Hello, Real Estate Enthusiasts!

I'm at an exciting juncture in my journey towards becoming a real estate professional. While I'm all in on this new career path, there are a few things I'm still trying to figure out. Particularly, I'm looking to offset deferred W2 income from a previous employer (I don't work any hours there currently) with real estate depreciation and operational losses.

So here are the questions I'm grappling with, and I'd truly appreciate your expert opinions:

Questions:

1. W2 Income and RE Professional Status:
   • Can you qualify as a real estate professional while still receiving deferred W2 income from a previous job?
2. The 750-Hour Requirement: Strategies and Tips:
   • How do you recommend accumulating the required 750 hours of real estate activities?
   • Do tasks like preparing for a real estate license, commuting, and researching properties count toward this time?
   • Does research time that ultimately leads to a property purchase count?
   • What about time spent managing tenants, say on Airbnb?
3. Active Losses and Income Types:
   • How do active losses from real estate investment typically offset other types of income? Do they tackle W2 income first, or passive income like dividends?
4. Year-End Property Purchase and Depreciation:
   • If I buy a property on December 31, can I still claim depreciation for that year?

I'm committed to working full-time as a real estate professional and will have my first property soon. I want to ensure I'm following all guidelines and not missing anything crucial.

Your insights will be invaluable to me, so please drop your thoughts and advice in the comments below!

Thank you for your time and expertise!

[Michael Plaks]

@Japnik Singh

1. Depends on the timing. If you quit in January - probably yes. If you quit in September - probably no.

2. Very complex question, not for an online forum. Also, AirBnB has nothing to do with REP status: https://www.biggerpockets.com/forums/51/topics/1122635-the-s...

3. Dividends and W2 are taxed the same in most cases. 

4. Not unless you bought it completely ready and made it available immediately. Or bought it with a tenant.

Trying to learn these very complex issues by asking online is not going to work, sorry.

[Michael Plaks]

@Japnik Singh

1. Depends on the timing. If you quit in January - probably yes. If you quit in September - probably no.

2. Very complex question, not for an online forum. Also, AirBnB has nothing to do with REP status: https://www.biggerpockets.com/forums/51/topics/1122635-the-s...

3. Dividends and W2 are taxed the same in most cases. 

4. Not unless you bought it completely ready and made it available immediately. Or bought it with a tenant.

Trying to learn these very complex issues by asking online is not going to work, sorry.

[Kory Reynolds]

Quote from @Michael Plaks:

@Japnik Singh

1. Depends on the timing. If you quit in January - probably yes. If you quit in September - probably no.

2. Very complex question, not for an online forum. Also, AirBnB has nothing to do with REP status: https://www.biggerpockets.com/forums/51/topics/1122635-the-s...

3. Dividends and W2 are taxed the same in most cases. 

4. Not unless you bought it completely ready and made it available immediately. Or bought it with a tenant.

Trying to learn these very complex issues by asking online is not going to work, sorry.

 Agreed with everything above.

Time spent operating short term rental type properties can apply to the first test of being a real estate professional - the 750 hours / more than 50% of personal services.  However, it may not count towards your second material participation test for any more traditional rentals and get to 'work around' the passive activity loss rules - Short Term Rentals can be classified circumstance pending as "ordinary" type income, thus falls in a different bucket.  One can be a real estate professional but still not have the ability to deduct losses related to rental real estate if they do not materially participate, by grouping the activities or otherwise.

The write up that Michael provided above is a great guide on the topic for anyone thinking they found gold with the STR "loophole".

It is a rather complicated facts and circumstances analysis, so it is unlikely you'll get any commitment from the pros on this board about what your situation definitely is or is not without sitting down and getting into the details.

[Account Closed]

Becoming a real estate professional can have significant tax advantages, but it's important to navigate the rules and requirements correctly. I'll provide some insights into your questions, but please consult with a tax professional or CPA who can provide tailored advice based on your specific situation.

1. W2 Income and RE Professional Status:
   • You can potentially qualify as a real estate professional while still having W2 income from a previous job. However, meeting the IRS requirements for real estate professional status involves demonstrating that real estate is your primary business activity, and you spend more time in real estate activities than in any other trade or business during the year. The W2 income alone does not disqualify you, but your level of involvement in real estate is crucial.
2. The 750-Hour Requirement:
   • To meet the 750-hour requirement, you should maintain detailed records of your real estate activities. This can include time spent on property management, research, property acquisition, real estate-related travel, and any other activities related to your real estate business. Time spent on preparing for a real estate license and commuting generally counts, but it's essential to document these hours accurately.
   • Research time that leads to a property purchase can count toward your total hours, as long as it's related to your real estate business activities.
   • Time spent managing tenants on platforms like Airbnb typically counts, as it's part of managing your real estate investments.
3. Active Losses and Income Types:
   • Active losses from real estate investments can offset other types of income, including W2 income. These losses can help reduce your overall taxable income, potentially resulting in a lower tax liability.
   • Active losses are generally applied first against your other sources of active income (like W2 income) and then against passive income. Any excess losses may be carried forward to future years.
4. Year-End Property Purchase and Depreciation:
   • If you buy a property on December 31, you can typically claim depreciation for that year. However, the amount of depreciation you can claim may be prorated based on the number of months the property is in service during the tax year. Consult with a tax professional to ensure proper depreciation calculations.

It's crucial to maintain meticulous records of your real estate activities, including dates, times, and descriptions of tasks performed. These records will be essential in substantiating your claim as a real estate professional if you are ever audited by the IRS.

Remember that tax laws and regulations can change, so staying up-to-date and working with a tax professional is essential to ensure you're maximizing your tax benefits while following all guidelines. Your commitment to thorough record-keeping and adherence to IRS rules will help you make the most of your real estate investments.

[Balaji A.]

Question #1.  Yes.

Question #2 :"preparing for a real estate license, commuting, and researching properties "  :-  do NOT count towards 750 hours. 

Also, Refer to : https://www.irs.gov/publications/p925. for details

[Eric Williams]

Quote from @Michael Plaks:

@Japnik Singh

1. Depends on the timing. If you quit in January - probably yes. If you quit in September - probably no.

2. Very complex question, not for an online forum. Also, AirBnB has nothing to do with REP status: https://www.biggerpockets.com/forums/51/topics/1122635-the-s...

3. Dividends and W2 are taxed the same in most cases. 

4. Not unless you bought it completely ready and made it available immediately. Or bought it with a tenant.

Trying to learn these very complex issues by asking online is not going to work, sorry.

 I'm going to respectfully disagree.

Most dividends you see in a brokerage account are going to be of the type deemed qualified dividends and thus eligible for capital gains rates.

Basically, assuming you are referring to active losses as equivalent to nonpassive losses, it would be considered an ordinary type like wages.

Also for purposes of 469 dividends are a special category outside passive income called portfolio.

1(h)11

(11) Dividends taxed as net capital gain (A) In general For purposes of this subsection, the term “net capital gain” means net capital gain (determined without regard to this paragraph) increased by qualified dividend income.

[Account Closed]

Becoming a real estate professional and navigating the tax implications can be complex, but your commitment to learning and getting it right is commendable. Here are some insights to help address your questions:

W2 Income and Real Estate Professional Status:

1. You can potentially qualify as a real estate professional while still receiving deferred W2 income from a previous job. The key factor is whether you meet the IRS criteria for being a real estate professional based on your time and activities in the real estate field, regardless of your previous employment.

The 750-Hour Requirement: Strategies and Tips: 2. Accumulating 750 hours in real estate activities can include tasks related to your real estate business, such as property management, research, showings, negotiations, and other real estate-related work. However, commuting to a property would typically not count unless it's for a specific work-related purpose.

1. Time spent on researching properties that ultimately lead to a purchase can count towards your 750-hour requirement.
2. Time spent managing tenants, like those on Airbnb, can also count towards your hours, as it's a real estate-related activity.

Active Losses and Income Types: 5. Active losses from real estate investments can offset other types of income, including W2 income. Real estate losses can be used to reduce taxable income from other sources. However, the exact mechanism of how this works may depend on your specific tax situation, and it's advisable to consult with a tax professional.

1. Real estate losses can also be used to offset passive income, but if you qualify as a real estate professional, you may not be subject to the passive activity loss limitations.

Year-End Property Purchase and Depreciation: 7. If you buy a property on December 31, you can still claim depreciation for that year. The IRS allows you to claim depreciation based on the date the property was placed in service, which is typically the date it becomes available for rent or use.

It's important to keep detailed records of your activities and hours spent in real estate work, as this will be crucial in documenting your qualification as a real estate professional. Consulting with a tax professional, preferably one experienced in real estate taxation, is highly recommended to ensure you're following the tax rules correctly and optimizing your tax benefits. Tax laws can change, so staying updated is important as well.

Your commitment to understanding these nuances is a positive sign for your real estate career, and professional guidance will help you navigate these complex tax matters effectively.

[Angelina Lee]

Thank you everyone for this helpful info! After reading through everyone's post I have one quick question:

1. To qualify for Real Estate Professional, can you work for someone else/a company in the real estate services industry or do you have to own your own properties yourself and work on them to qualify?

I ask because my goal for 2024 is to go back to work (since I've been a full time mom for the last 3 years) and I want to qualify as a Real Estate Professional so that we can shelter some of my husband's W2 income, and we're confused on whether I need to manage our own real estate portfolio or can I work from someone else/or a company to qualify for this Real Estate Professional tax benefit.

Thanks in advance for your help! 

[Michael Plaks]

@Angelina Lee

Working on W2 for someone else does not count (in fact, counts AGAINST your hours) unless you own 5% of the company you work for.

[Jaedon Carlisle]

Quote from @Michael Plaks:

@Angelina Lee

Working on W2 for someone else does not count (in fact, counts AGAINST your hours) unless you own 5% of the company you work for.

@Michael Plaks I currently work for a property management and investment company as a full-time W2 employee. I will be receiving my RE License shortly.

My understanding of the rule would be to request 5.01% ownership in my company if I wanted to utilize the REP status correct? I know this is a strange question, but is there any advice this forum can provide me in requesting that ownership percentage?

[Angelina Lee]

Quote from @Jaedon Carlisle:

Quote from @Michael Plaks:

@Angelina Lee

Working on W2 for someone else does not count (in fact, counts AGAINST your hours) unless you own 5% of the company you work for.

@Michael Plaks I currently work for a property management and investment company as a full-time W2 employee. I will be receiving my RE License shortly.

My understanding of the rule would be to request 5.01% ownership in my company if I wanted to utilize the REP status correct? I know this is a strange question, but is there any advice this forum can provide me in requesting that ownership percentage?

 Yes, I'm trying to do the same. I believe if you went freelance, and provided these services as a property manager to the company you're currently W2 with, then I believe that works as well because you then would be 100% owner of your own company, serving as a freelance property manager to the company you currently have a relationship with. I hope that makes sense. It's a strategy I may implement next year in order to qualify as a Real Estate Professional.