Real Estate Professional Designation?
I've recently started tracking my hours to see if I can qualify for the Real Estate Professional designation for tax purposes.
Is there anyone who can tell me whether time spent on "education" efforts (reading books, home study courses, forums like this) are valid hours to count?
Thanks!
Yes everything involved directly or indirectly with real estate...
Do you do this in your spare time (that is you have a full time job), or is this professional real estate pursuit a full time occupation?
What aspect of the real estate industry will you pursue?
How does this Real Estate Professions designation affect your taxes? :-?
Kim
Thanks for the input. I was pretty sure that i was right, but wanted someone else to verify--without calling my accountant!
I am doing this very part-time. I am a stay-at-home Mom with with 2 little kids and a husband who works 70-80 hrs. most weeks. I am planning to get my RE license when both my kids are in school, but that's a couple years away.
Right now I am concentrating on buying under-valued (below market) properties (singles and smaller multis) that need a little TLC with very little out of pocket and holding them as rentals. I settle on my 1st 2 properties next Monday. (3 units in all)
As far as the tax advantages of the Real Estate Professional designation, I'd recommend reading Diane Kennedy's book, Real Estate Loopholes--part of the Rich Dad, Poor Dad series. EXCELLENT!
I've definitely got the REI fever!!
Kasm, from what I understand if you are not a real estate professional you are limited to $25,000 worth of depreciation a year, a real estate professional (someone who's main income comes from real estate and spends at least 15 hours a week doing real estate related stuff) has unlimited depreciation levels.
Ray
Ray,
Your understanding is imperfect. You can take ALL the depreciation you are allowed. There is a $25K maximum limit on taking net passive losses against ordinary income. This limit is waived for real estate professionals. For the non-professional, any passive loss that exceeds the allowance is suspended and carried forward to next year's tax return.
The problem for real estate professionals who choose to treat their passive income as active income (thus the unlimited deduction), is that their profit on the sale of their investment property becomes ordinary income too --forfeiting capital gains tax treatment.
Could someone clarify something for me? The accountant I spoke with today said that it won't help as much for me to have the Real Estate Professional designation if my husband doesn't have it, too. Probably because I don' t have any earned income--I'm a SAHM.
Should I bag it????
Why not form an S corp and buy your properties or manage them and take profit through that venue and avoid most (if not all for the first year or two) all of your self employment taxes?
[addsig]
Thanks for the clarification newkid, and I believe that if one person of a married couple is classified as one, you are fine
I too read Rich Dad's book that discusses this topic. The posts are correct with the limit of deductability etc. Larger question: Why invest in anything to loss money? Even if you can deduct the losses, it still is money out of your pocket and for you not to use. The premise of Rich Dad's books is to find methods of MAKING MONEY, not losing it. This is what happens when you work for someone else. I believe that as you read more of Rich Dad's books that this will come to light. As I told my brother, anyone can stand of the street corner and giveaway money, it's what you keep that counts.
Todd,
The advantage of owning rental property besides the positive cash flow and future appreciation is the ":phantom" expense called depreciation. Depreciation expense can often make a positive cash flow property appear to have a tax loss. Depreciation does not take any money out of your pocket while it reduces your taxable rental income.
Newkidintown: I agree with you to your comments, but for this poster, she states that her husband works 70-80 hours per week. I assume not a high income earner. Diane Kennedy's book's chapter on RE Professional discusses how a RE Pro can use their position to reduce taxes with investments in RE by deducting losses (depreciation of RE values). If we assume that they (poster and husband) make 60K per year and have used the tax code to reduce their tax bill, they might be in the 15% tax bracket. If she has $5000 of depreciation, this would yield $750 of saved taxes. RE Pro expenses are more than that......and their deductions too.
I general note: While statements of facts in RE investing are helpful, it doesn't help anyone if the facts don't take into account the background of the problem. Taking a RE deduction for RE depreciation without income to take it from does nothing to the bottom line for anyone. You can't spend a deduction.
I need to clarify here, because we've gotten way off base with my original issues.
I'm not sure where Todd's assumptions originated, but my point about the number of hours my husband works was that there is no way he has time/inclination to think about getting the designation. He works that much because he's in a high power/stress job--for which he is very well compensated!! *LOL* Because of that we are in a high tax bracket and could also use the additional tax relief the designation would provide. My understanding (confirmed by my accountant) is also that the designation broadens my deductible expenses (car lease, cell phone, office space, etc.)
And the properties will have a positive cash flow of several hundred dollars a month each--even if I end up paying a management company.
I'm definitely in this game to make money, not lose it!
Didn't mean that last post to sound pissy--just wanted to clarify!
One thing I forgot to mention is that I have a friend who's been a full-time REI for about 10 years now. He's made MILLIONS in my area Using all the LEGAL tax strategies he can, he hasn't had to pay ANY taxes in at least the last 8 years!
I want to make sure I play it the same way--Diane Kennedy's way!. :-D
The thing that I hate about these questions and the comments provided is that we all get out of joint over small issues. I thought I discussed this within a previous post to Newkidintown. The assumptions were "let's assume", and where done to provide some guidance. Getting a little argumentative here: I've done my own Income tax for over 30 years, there's a difference to a tax deduction and tax credit. I do understand Schedule E and 1040 forms. I've been a licensed RE agent for over 12 years, have a regular high paying job and do RE investing too. The point I was attempting to make is you don't have to qualify as a RE Pro to take advantage of tax savings. Operating as a RE investor, (and you have RE income) the expenses you incur can be used to offset your income. (to produce deductions) I have read all of the Rich Dad's series of books. I have read other RE books, taken RE classes, performed a lot of research on my own in RE. Do I know everything about RE? No... But I do know that I attempt to share my knowledge with you through these posts and forums and I don't charge for my thoughts as a CPA or Attorney would. Therefore, I think we need to read the comments.