Obtaining "Real Estate Professional Status" as Consultant?

Question

Hi everyone,

My wife and I currently live in South Korea and plan on moving back to the USA in early 2019. Right now we own 9 turnkey SFH's and plan on having 24 by the end of the year, maxing out our 20 Fannie Mae allotment in the process. Because our W2 jobs, rental income, and stock sales may put us above the $150k threshold for real estate deductions for married-filing-jointly,  I am looking into getting "real estate professional status" designation by the IRS in order to write off of those interest payments and depreciation. However, because I do not manage my properties myself, I can't in all honesty claim that I actively work >750 hours per year on my rentals to satisfy the IRS requirement.

I am finishing an MBA in finance right now and when I return to the US I was wondering if I could get a job with a commercial real estate company or private RE equity company being hired as a consultant through my c-corp. This would satisfy the IRS rule of having a 5% or greater ownership in the company which actively conducts real estate activities through which one can claim RE professional status. The upside for the potential employer would be that they would save a ton in to having to pay me any benefits, and I could earn a steady income while still claiming RE professional status.

Does this sound feasible? As I see it my only other options would be to buy some local rentals and do the property management work myself to get the 750+ hours per year or get a RE license and be a RE agent. However, I would prefer to put my newly minted MBA to better use and have steady outside employment.

Any insights or suggestions would be greatly appreciated!

Thanks,

Wade

Ashish Acharya · Answer

@Wade Chilcoat ,

First of all, you dont need RE pro status to write off interest and depreciation.  Hopefully you knew that. REpro status is only beneficial if you have a net loss on your rentals. if you have a net income, it does not matter.

I do not know about your career, but are you going to change your career just to qualify for the real estate pro status?

Keep in mind that if you have a net loss, it is carried over, and you will eventually get to deduct them when you sell the house or when you have income. If you do not qualify the RE Status, maybe invest in the rental that gives you net tax loss, so it offsets other net rental income. for eg, buy and hold a house for good appreciation even if it has net tax loss so that you can offset your other cashlowing rentals.

You said you have a W-2 job too.  If you work there full time, it might be hard to meet 50%  of the personal service. If you changing your career than it is doable. As far as your plan, if structured properly, it's possible.

Keep in mind that you cannot add the hours you worked on your rentals to meet that 750 hours requirement if you do not materially participate (There is 7 point test for this) in the rental activity. You have to meet the 750 hours requirement via other material participation Real estate business.

I bring up material participation because it is widely misunderstood. Material participation plays a role in two distinct aspects of this rule for real estate professionals.

• First, when determining whether a taxpayer qualifies as a realestate professional, only real property trades or businesses in which the taxpayer materially participates are counted. 
• Second, once it is determined that a taxpayer qualifies as a real estate professional, nonpassive treatment is available only for rental real estate activities in which the real estate professional materially participates.

So if you are not materially participating in the rentals to begin with, RE pro status really does not matter.

Hope that helps.

Basit Siddiqi · Answer

@Wade ChilcoatAre you making $40k - $75k in qualified dividends and/or long-term capital gains?One thing to ask yourself is if you want to net the losses from rental real estate to gains that only be taxed at 15%(federally) + any state taxes.I mean less taxes is better, but you may want to strategize when you get real estate professional status what the losses will be offsetting. Ideally - you want to offset income that is taxed at 25%+(or at least the higher tax brackets)

Wade Chilcoat · Answer

@Ashish Acharya

Hi Ashish,

Thanks for the detailed response. Because I am making between $40k-$75k each year in the stock market, I was looking into having my RE losses eat into the capital gains I am earning in stocks. It looks like I would need RE professional status to do this and getting a local RE license and working as an RE agent seems like the easiest way to obtain this qualification from the IRS.

I will talk to my accountant later this spring to get his take on things (after tax season), but I just wanted to get an idea now of what I should be focusing on before the big move back to the USA next year.