Summary: Becoming a qualified real estate professional is a game-changer for leveling up your tax benefits and investment income – and it’s not as hard as you might think! We’re making it simple today. Learn why you should consider becoming a REP, and exactly how to do it.
If you make any sort of money through real estate, you might consider yourself a real estate pro. And in the normal meaning of the word, you’d be totally right!
Investors, real estate agents, brokers, lawyers, etc, are all different types of “pros” in the real estate world. Buttt today we’re talking about more than making money. We’re diving into how to be recognized as a real estate professional in the eyes of the IRS.
That requires a few specific qualifications.
Now, you might be wondering WHY having your real estate professional status is something to even consider. If so, you’re in the right place for sure. 👌
There are reasons why meeting the real estate professional status qualifications are super beneficial to you as an investor. At the top of that list are the big tax benefits available to those who qualify for REPS.
And yes…they are sooo worth it.
So, today we’re sharing how to level up your investing and get the best tax benefits possible, through becoming a REAL, real estate professional. We’ll give you everything you need to know to decide if it’s the right move for you and your financial future. ✨
We’re covering do ⏬
- The benefits of being a qualified real estate professional
- Real estate professional status requirements
- How to document your REP status for the IRS
- So, should you go for REPS or not?
The benefits of being a qualified real estate professional
First of all, it’s important to note that you do not NEED to be recognized as a real estate professional to make money through real estate investing. It has nothing to do with your experience level as an investor, or your ability to create passive income for yourself.
Glad we got that straightened out. 😆😆
Now, let’s talk about why you might WANT to become a real estate professional… AKA, what’s in it for you?
You can already get some awesome tax breaks by simply owning and investing in real estate. But by simply meeting a few qualifications, you can open the door to wayyyy more tax deductions – saving yourself TONS of money every year. 🤩🤩
We’re talking about major deductions, including business expenses, property depreciation, and losses. Real estate professionals can deduct all passive losses against their non-passive income.
You know what that means?
With real estate professional status, it is actually possible to pay $0 in taxes. 🤯🤯
4 real estate professional status requirements
Now we’ll lay out the guidelines for how to qualify as a real estate professional. The good news is, you don’t have to go back to school to get fancy degrees. You miiiiight even find that you already fit into the qualifications of a REP, or you can with slight adjustments.
1️⃣ Follow the more than 50% rule
The more than 50% rule has to do with how much time you spend working in real estate. When it comes time for filing taxes, the IRS wants to see that more than 50% of your working hours were dedicated to real estate work.
So, if you’re working a full-time job, that clearly doesn’t leave much room for claiming REPS. You have to be able to show that you spent a little more time in real estate work than in non-real estate work.
2️⃣ Meet the 750-hour requirement
In addition to working more in real estate than any other job, you have to at least put in 750 hours of work to qualify for real estate professional status. The thing about these hours, though, is that it doesn’t matter when you complete them between Jan 1st and the end of the year.
Sooo you could do nothing in real estate for a few months and still qualify for REPS based on these criteria. As long as you get those 750 hours in, you’re golden. 👌
3️⃣ Prove material participation
Material participation means that the activities reported to the IRS need to be related to the real estate field. For example, it doesn’t count to simply be an investor in a real estate deal. You need to prove that you personally participated in activities related to the deal.
4️⃣ It’s every taxpayer for themselves
The final requirement means that you can’t combine your hours with a business partner. Each taxpayer needs to meet the 50% rule, the 750-hour rule, and the material participation rule for themselves.
BUT there’s an exception when it comes to married couples. If filing jointly, and one person in the couple reaches the other REPS requirements, then the tax benefits will be applied to the total taxable income.
So, how can you meet these requirements?
You don’t need a real estate license to get special REPS tax benefits. Alllll you have to do is meet the criteria we just discussed.
But, you might be wondering what all this time in real estate looks like. If you’re a purely passive investor, you get to enjoy the incoming cash without being involved in the day-t0-day work of real estate ownership and management.
Aaaand that’s awesome, with plenty of tax benefits of its own. 😏😏
The thing is, passive investing doesn’t require hours of real estate work, so it won’t get you to that real estate professional status on its own.
If you want to tap into the extra deductions of REPS, you’ll want to get into some active investing, too. You can still totally reap the returns of your passive investments, while also getting into the other side of investment deals.
We’ve been doing both active and passive investing for a while…and we LOVE it. 😍😍
To be an active investor, and rack up your 750 real estate hours per year, you could consider becoming an apartment syndicator, or deal sponsor. Playing both sides of the field is a great way to diversify your investment portfolio, get REPS benefits, AND learn a ton while making lots of money!
Related: Check out this Cashflow Multipliers episode about what it’s like to be an active and passive investor.
How to document your REP status for the IRS
Let’s say you meet all the criteria, or you want to start meeting it to become a real estate professional. It only matters if you can prove it all to the IRS. So, learning how to document your hours of real estate-related work is extremely important.
This can be pretty simple, as long as you keep track of your hours throughout the year. We reeeeally don’t recommend just waiting until the last minute, and then frantically throwing this together.
Where are the procrastinators at? 🤣🤣
But if you can keep track while you go, it’s not difficult at all to prove your hours to the IRS.
You can use spreadsheets, Google workbooks, or any hour tracking method of your choice. Just be sure to list the date, duration, address of the workplace, and what activities were performed for all real estate-related work.
So, should you go for REPS or not?
Passive or active, REPS or not REPS…there’s not just one way to invest in real estate. Your investment journey is unique to your own goals and lifestyle. It may not look the same as the next person’s path.
We know that REPS isn’t for everyone. If you can’t designate the necessary hours for active investing or real estate related work, that’s okay!
You can still get amazing tax benefits from passively investing in real estate. Plus, purely passive income means you get to make money while you sleep.
Does it get any better than that?!
But, if you find that you want to expand your portfolio and get into the active side of investing, you might consider trying to qualify for REPS.
We just want you to know your options so you can make the best investment decisions for you…always. 😘😘
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