If you own rental real estate, there are three different
ways to treat your rental losses depending on your status.
One of these is "Real Estate Professional."
First, let's dispense with one myth: Real Estate
Professional status does not mean you have to hold a real
estate license. Rather, it is a designation you obtain by
meeting certain specific requirements. The first
requirement is that you spend more than 750 hours in real
property trades or businesses in which you materially
participate. The second requirement is that you spend more
time in your real property trades or businesses than in ALL
OTHER trades or businesses combined. Time spent as an
employee in real property activities is counted only if you
are a more than a 5% owner in that business. If you
qualify as a real estate professional you can deduct all
your current year rental real estate losses against other
income without limitations.
What is a real property trade or business? A real property
trade or business is defined as ANY real property
development, redevelopment, construction, reconstruction,
acquisition, conversion, rental, operation, management,
leasing, or brokerage trade or business.
You have to meet the above requirements each year. So, you
could be a real estate professional one year but not the
next. Only one spouse needs to meet the requirements in
order for a married couple to take advantage of the
benefits provided by the real estate professional status.
The 750 hours test must be met for each activity. So for
example, say you have three rental properties. The general
rule is that you have to perform at least 750 hours on
activities related to EACH of those three properties.
Fortunately, there is an exception to this rule. If you
make the election to aggregate all of your rental real
estate activities into one activity, you only have to meet
the 750 hours requirement once for the tax year.
What types of activities qualify as real estate
professional activities? Activities such as:
- Searching for possible rental properties
- Attending real estate seminars or reading real estate
books
- Meeting with real estate agents and viewing properties
- Meeting with mortgage brokers with regards to getting
loans on properties
- Travel time to and from the seminars and your property
searches
- Preparing your bookkeeping and tax information for your
rental properties
- Time spend buying or selling properties (i.e. signing the
closing documents)
- Studying and reviewing financial reports (Investor-type)
- Preparing summaries or analyses for personal use
(Investor-type)
- Monitoring finances or operation in a non-managerial
capacity (Investor-type)
An important note to the investor-type activities mentioned
above is that these activities can only be counted towards
real estate professional time if you are involved in the
day-to-day operations or management of the activity for
which you perform those tasks. Essentially, this means
that if you have an independent property manager and your
only real estate business is your rental properties, you
probably will not qualify as a real estate professional.
The extent of an individual's participation in an activity
may be established by any reasonable means. Contemporaneous
daily time reports, logs, or similar documents are not
required if the extent of such participation may be
established by other reasonable means. Documentation
required includes the identification of services performed
over a period of time and the approximate number of hours
spent performing such services during such period, based on
appointment books, calendars, or narrative statements.
Documentation is the key when claiming real estate
professional status. Most taxpayers who lose in the tax
courts lose because of poor documentation. Although
documentation through a reasonable means is pretty vague,
the tax regulations are clear that post-event "ballpark
guesstimates" are not permitted and will not hold up in the
tax courts.
Real Estate Professional status is such an important
designation for a high-income real estate investor that we
strongly recommend you spend time with your Tax Coach to
determine if and how you can become a Real Estate
Professional and deduct all of your rental losses.
Are you ready to permanently reduce your taxes?
Warmest Regards,
Tom
----------------------------------------------------
Tom Wheelwright is not only the founder and CEO of
Provision, but he is the creative force behind Provision
Wealth Strategists. In addition to his management
responsibilities, Tom likes to coach clients on wealth,
business, and tax strategies. Along with his frequent
seminars on such strategies, Tom is an adjunct professor in
the Masters of Tax program at Arizona State University. For
more information, please visit
http://www.provisionwealth.com
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