RE Professional Tax Benefit w/ Spouse W-2 Income

[Joyce Talley]

Hey everyone, hoping to get some insight from this group regarding the RE Professional Tax benefit.

I see lots of articles claiming that I should be able to deduct rental losses against my husband’s W-2 income if I claim the RE Professional Tax status. However, I spoke to a CPA just now and he told us that this is not accurate. He said that I would only be able to deduct against my own income. He also said that I'd only be able to do this with properties that are purely under my name, and if I co-own them with my husband, then I wouldn't be able to even deduct them against my own active income.

Can anyone confirm this info? Here’s a snippet from a Bigger Pockets article I found showing that I should be able to deduct against my husband’s income:

"Here’s another great thing about real estate professional benefits: As soon as one of the couple meets the qualifications, both receive the benefits. Jamie’s rental losses can offset Darin’s medical income—even if Darin himself is not a real estate professional." Link to article here.

Any help here would be greatly appreciated!

Joyce

[Ashish Acharya]

Originally posted by @Joyce Talley:

Hey everyone, hoping to get some insight from this group regarding the RE Professional Tax benefit.

I see lots of articles claiming that I should be able to deduct rental losses against my husband’s W-2 income if I claim the RE Professional Tax status. However, I spoke to a CPA just now and he told us that this is not accurate. He said that I would only be able to deduct against my own income. He also said that I'd only be able to do this with properties that are purely under my name, and if I co-own them with my husband, then I wouldn't be able to even deduct them against my own active income.

Can anyone confirm this info? Here’s a snippet from a Bigger Pockets article I found showing that I should be able to deduct against my husband’s income:

"Here’s another great thing about real estate professional benefits: As soon as one of the couple meets the qualifications, both receive the benefits. Jamie’s rental losses can offset Darin’s medical income—even if Darin himself is not a real estate professional." Link to article here.

Any help here would be greatly appreciated!

Joyce

 You should be able to deduct losses against your active income in your joint tax return. 

Once at least one spouse qualifies as a real estate professional, the couple's rental real property activities are no longer per se passive and the activities are examined for material participation using the collective participation of both spouses.

Example.

Bob and Sally Smith are both lawyers, each owning a one-half interest in the Smith Law Firm where they both work approximately 800 hours per year. Bob is also a licensed real estate broker, working 600 hours per year helping customers buy and sell property. The couple owns a small residential apartment building that requires 250 hours per year of work. If Bob and Sally decide to split the time working in the rental activity, each working 125 hours, neither one would be considered a real estate professional and any losses incurred would be per se passive. Even if Bob's 125 hours in the rental activity were considered material participation, he would only have 725 hours for the year, meaning his time materially participating in real estate activities would be less than one-half of his personal services and less than 750 hours. 

However, if Bob and Sally agreed that Bob would handle all of the rental activities, he would be considered a real estate professional because more than one-half of his personal services would have been in real property trades or businesses and he would have worked at least 750 hours in real property trades or businesses. The result would be that their rental activity would not be per se passive and, since they materially participated in the rental activity, the couple could deduct the losses against their ordinary income.