Another Real Estate Professional Status Question

[Tim Rogers]

Hi All,

Long time lurker here. I have read dozens of posts about REP status and it's still clear as mud to me. I am hoping someone educated can chime in on my specific situation.

I am a high income earner, owning a construction business that specializes in wineries and luxury residential. My wife is also a high income earner--she works in the hospitality and wine space. We are looking towards STRs in order to lower our W-2 taxable income via cost seg and bonus depreciation.

I believe my line of work qualifies me as a REP, but what I am not clear on is whether I would still need to meet the 'material participation' requirements in our rental business in order for our losses to be non-passive. I have read that qualifying as a REP doesn't mean your losses automatically become non-passive and that you still need to materially participate in the rental business in order for losses to become non-passive. Is this correct? Or does my business alone qualify me as a REP and allow me to take non-passive losses with STRs?

Thanks in advance!

[Kelly O'Keefe]

Hi @Tim Rogers

I don't know the specifics of your situation, but it sounds like you are in the "Development/Redevelopment" qualifier of the REPS. Qualifying for REPS does not automatically mean you can offset income, you need to have material participation, at least a 5% ownership stake and an amount at risk. 

To my knowledge, STRs do not qualify for the real estate professional status as they are seen as a business venture and not real estate activities (this is why it is a "loophole"). It may be simpler to pursue the STR loophole strategy as there is no limit the losses used to offset your W-2 income. With LTRs there is a 25k loss limitation that would be phased out for high income earners. I believe this was the loss limit @Chris Seveney referred to. For the STR loop hole and REPS there is no limit to the losses that can be used to offset W-2 income.

Hope this helps