REPS And Active Losses and Gains

[Scott Trench]

Hi tax pros - I have a question about REPS status.

First, selfishly, do you believe that my job as CEO of BiggerPockets, which I spend obviously spend essentially all working hours on, and dwarfs activities involving my real estate portfolio (which is managed via a property manager) qualifies me for REPS status?

Second, I have a question about REPS status in a longer term sense.

The primary benefit of REPS status, as I see it, is to take passive real estate losses, usually from depreciation and accelerated depreciation via cost-segregation, and use those losses to offset active income, reducing current or future AGI and tax burden.

I’m clear about this benefit, but what I’m unclear on is the consequence in out years.

For example, if I put $100K into a multifamily syndication, and the syndication does a cost seg, resulting in a $40K loss, I believe that a Real Estate Professional could claim that $40K loss against their other income and reduce their AGI accordingly.

From there, it gets murkier. When the syndication is sold in future years, are the gains, depreciation recapture, and distributions also taxed as active income? Could that bite our REP in year 5 when a big pile of ordinary earnings income is realized (if they don’t 1031 and defer it)?

Or, is REPS really a “free lunch” for those who qualify - they can claim an active loss reducing ordinary income today, AND get to claim passive and capital gains in the future on the appreciation?

[Michael Plaks]

Quote from @Scott Trench:

Hi tax pros - I have a question about REPS status.

First, selfishly, do you believe that my job as CEO of BiggerPockets, which I spend obviously spend essentially all working hours on, and dwarfs activities involving my real estate portfolio (which is managed via a property manager) qualifies me for REPS status?

Second, I have a question about REPS status in a longer term sense.

The primary benefit of REPS status, as I see it, is to take passive real estate losses, usually from depreciation and accelerated depreciation via cost-segregation, and use those losses to offset active income, reducing current or future AGI and tax burden.

I’m clear about this benefit, but what I’m unclear on is the consequence in out years.

For example, if I put $100K into a multifamily syndication, and the syndication does a cost seg, resulting in a $40K loss, I believe that a Real Estate Professional could claim that $40K loss against their other income and reduce their AGI accordingly.

From there, it gets murkier. When the syndication is sold in future years, are the gains, depreciation recapture, and distributions also taxed as active income? Could that bite our REP in year 5 when a big pile of ordinary earnings income is realized (if they don’t 1031 and defer it)?

Or, is REPS really a “free lunch” for those who qualify - they can claim an active loss reducing ordinary income today, AND get to claim passive and capital gains in the future on the appreciation?

I assume, Scott, you're paid by BP on W2. Qualifying for REPS then hinges on two questions:
1. What are your duties as the CEO? Managing a company usually does not involve participating in real estate acquisition, management or construction. It's not enough that your company serves the real estate industry, your actual duties should be directly related to real estate, as opposed to the typical executive responsibilities. 
2. And if you're directly working with real estate in your CEO role, do you own 5% of BP? If not, then your W2 hours do not qualify for REPS even if directly related to real estate.

Quit this job of yours and start wholesaling instead.  :)   Or marry a full-time Realtor.

Are you going to run a syndication or just give them money to invest? If you're a passive investor in syndications, your K1 losses are usually not deductible - even if you qualify for REPS. 

Finally, your hunch is correct: when the syndication cycle closes, your past "free lunches" will have to be paid for, aka recapture.

Here're some relevant posts from your favorite site:
https://www.biggerpockets.com/forums/51/topics/839015-are-sy...
https://www.biggerpockets.com/forums/51-tax-legal-issues-con...
https://www.biggerpockets.com/blog/real-estate-professional-...