Owning rental property can be a great way to shelter income.
Who Qualifies As a Real Estate Professional?
Ok, so what qualifies a person as a “real estate professional”? As defined by the IRS , to qualify as a real estate professional, you must meet both of the following two criteria:
First, more than half of the personal services you provide (that is, at least half of your work hours) for the tax year must be in a real property trade or business (including rental real estate activities). If you are an employee in a real estate-related business, your activities count only if you own more than 5% of the business.
Secondly, you must work more than 750 hours during the tax year in a real property trade or business.
And what counts as a “real property trade or business”? The IRS’s definition is very broad: A real property trade or business is any business that develops or redevelops, constructs or reconstructs, acquires, converts, rents or leases, manages, or brokers real estate. Your activities overseeing your own rental real estate count toward the real estate professional status.
If you do qualify as a real estate professional, you’ll want to keep a log of the time you’re spending on your real estate-related activities.
If you’re married and file jointly and you or your spouse qualifies as a real estate professional, you can apply the deduction to both your incomes. Let’s take an example. Let’s say Jenny and Bill are married and Jenny is an executive at a pharmaceutical company and her salary is more than $150,000. Bill retired early and spends more than 750 hours a year managing the couple’s rental properties. Because Bill qualifies as a real estate professional, the couple can deduct all of their rental losses from Jenny’s earned income. [[AdMiddle]
The real estate professional status can be an excellent tax shelter if you meet the criteria. Remember, as a real estate professional, the rental real estate losses (including losses from depreciation) you can deduct are unlimited.
As always, everyone’s situation is different, so be sure to consult a tax or financial advisor before making important financial decisions. This podcast is not a substitute for professional advice.
Today, I’m giving away two copies of Real Estate Advantages by Sharon Lechter and Garrett Sutton. This book explains real estate professional status and other tax and legal strategies used by successful real estate investors. It’s included on the list of summer reading posted on the Money Girl website at quickanddirtytips.com. This week’s winners are Samantha in San Francisco and Iann C. Congratulations! Be sure to check your email for instructions and enjoy the book!
Cha-ching! That’s all for now, courtesy of Money Girl, your guide to a richer life.
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o IRS Publication 527, “Residential Rental Property”
o Real Estate Professional Criteria
o IRS Publication 925, “Passive Activity and At-Risk Rules”