RE Pro status to make the best case with your CPA and the IRS

[Melanie Baldridge]

Cost segs unlock these savings, but the losses won't offset your ordinary income from your job unless you are an RE Pro.

Here's how to think about RE Pro status to make the best case with your CPA and the IRS:

RE Pro Status starts with the IRS definition of a Real Estate Professional (IRS Pub 925).

It is not as simple as getting a real estate license or working for a firm that provides real estate services.

Ask yourself these questions to see if you qualify:

Q1: Are you in the right business? A real estate pro is spending their time in real property business. Builders, house flippers, brokers, etc.

Unfortunately, banking and finance services and certain architect and engineering services don't qualify. This includes cost seg pros.

Q2: Are you an equity owner? This trips a lot of people up. You must own at least 5% equity in the qualifying business.

Working a W-2 job at construction company =/= RE PRO
Owning a construction company == possibly an RE Pro

Q3: Are you meeting time thresholds? This is a bright line issue, and unfortunately this is where people lose.

RE Pros spend each of the following:

More than 750 hours of service during the year
AND
More than 50 percent of his/her time working in real property businesses

Additionally, I talk a lot about the benefits of the RE Pro spouse. If you are pursing that path then one spouse alone must meet both tests.

Qualifying hours for the 750 include time spent working on the business activities mentioned above.

Again, more than 50% of your time means this is way more than a hobby. It is typically your primary job.

The 40 hr/week W-2 worker is going to have a hard time convincing an IRS agent they are meeting this threshold.

STR loophole is a better path for my friends in this category.

Once you finally cross the pro hurdle, you're not done! You must also materially participate in your RE activities.

If you materially participate in each RE activity, losses are fully deductible. If not, even though you are a re pro, losses are passive & deductions are limited.

There are 7 scenarios that will qualify as material, and you only need to meet one:

*500 hours
*Substantially all participation
*> 100 hrs and at least 1/2
*Significant participation
*5/10 years
*Personal service activity w participation in last 3 years
*Continuous participation

To materially participate, you must be involved in the operations of the activity on a regular, continuous, and substantial basis.

Once you pass the pro test, the material participation often comes along for the ride.

You can elect to aggregate all rental real estate for purposes of measuring material participation under Sec. 1.469-9(g).

Your time spent on all your rental properties (STRs don't qualify) counts as one activity, making it easier to materially participate.

In order to make a strong case with your CPA and the IRS you need to document your hours.

Best practice is an hours log where you are as specific as possible. If you are audited the IRS will want to see supporting docs (e.g. calendar, CC statements, etc).

If you've reached the end of this thread and your NGMI on RE pro there are a few more options:

1. Buy RE for your business to operate out of
2. Generate lots of passive income that you need to offset
3. STR Loophole

If RE Pro status is in your future, congrats!

As always:

1. Talk with your CPA before making any decisions
2. Be mindful of Excess Business Loss rules
3. Taking bonus depreciation early is a tax deferral, not a tax savings.

Recapture is real and debt must be repaid!