Re Pro Status and income

[Melanie Baldridge]

There are several different types of income in the US tax code.

Two main types are “active income” and “passive income".

Active income is money you earn from working, such as wages from a W-2 job or income from running a business.

Passive income is money you earn from investments like real estate, stocks, or rental income from your RE portfolio where you earn $ without actively working.

Normally, you can't use passive losses (like losses from real estate investments) to offset active income like your salary from a W-2 job.

That is unless you are an RE Pro.

The reality is, that Real Estate Pro status is just a filing status similar to filing married or jointly.

And if you are a real estate professional you CAN use passive real estate losses to offset active income from other sources.

To qualify as an RE Pro you must:

1. Spend more than half of your total working hours in an RE business in which you materially participate.

2. You must work at least 750 hours per year in a qualified RE business.

So most people who have high-earning W-2 jobs outside of real estate wouldn't qualify.

But the unique thing about RE pro status is that even if you don’t qualify but your spouse does, you can both file jointly and claim the losses from your RE investments to offset your other active income together.

It's an incredibly powerful hack if you do meet the criteria.

In other words, marry a real estate agent who's an RE Pro!

We’re being funny because there's still a bit of nuance here.

There are strict guidelines and it's sometimes a blurry line between being an RE pro vs not.

Always talk to your CPA to see if you qualify.

That said, the benefits are definitely worth it if you do.

[Sean Graham]

Good stuff @Melanie Baldridge

[Charles Perkins]

This is a great example of how tax planning is as much or more important than tax preparation.  By the time most people come to see a CPA many tax savings opportunities have been missed.