When and How to Use the Real Estate Professional Tax Strategy

If you're watching this video, it's probably because you own rental property and someone's told you that being a real estate professional is the next best thing to slice bread. And it is pretty cool. So sliced bread. And on a tax return, a real estate professional can have a really positive impact, but it's not for everybody and it depends on your situation. And there's some rules on how you qualify. So I'm going to break it down and see if it's something you need to consider. Now, my name is Mark Kohler, and I'm a CPA attorney and a real estate investor. Now, notice how I use the word investor, because that's a big deal. We're going to talk about that term a little later. But I also wanted to point out the CPA and attorney issue as well, because this real estate professional classification important and the IRS knows that. And they audit this issue a lot. And a lot of people search around on Google to find the answer they want, then slap it on TurboTax and think they're going to be okay. You really want to make sure that you understand what the rules are and talk with your professional when you go to do your tax return. And if you're doing your own tax return flying solo, that's cool, but it's on you that you do it right. And, oh, I didn't understand is not a good defense under an audit. Okay, so I've got longer videos on this in my tax and legal library. At least a half hour to 45 minutes. Get to my website if you want to dive deep on this. But I'm going to hit the highlights first. Why? Why does this matter? Now I'm going to go over my other camera. I'm going to pull a Jimmy Fallon right over here. Here we go. So when you're investing, this is going to be your operations side, where you're doing fix and flips and rehabs. You might be a realtor, a contractor, a plumber, an electrician, a dentist, doctor, lawyer, whatever. That's your operations side. Over here is where all your rentals are. And you might have one llc, three llc, five llc, I don't know. But this is your investment side. Now, rental real estate generally produces a loss because you're writing off depreciation, travel, dining, home office, all the great expenses that come with rental property, including the mortgage interest that the tenants paying for you. So even though the property is going up in value and you're creating cash flow, that cash flow, nine times out of ten is tax free. So this is a big deal. And what a lot of people want is they want that write off on their tax return as well as the tax free appreciation and the cash flow and the mortgage reduction. All the beautiful things that come with rental real estate. Why myself, I buy rental real estate as well. And why my wealthy clients buy rental real estate. Because there's this trife quad vectra of cool benefits that come with it and the tax benefits are one of them. Now, if you're a real estate professional, all the losses from this real estate come out and are immediately deductible against your other income, whether it's you or your spouses. That's right. If you're married, if you or your spouse qualify as a real estate professional, all these losses are deductible right now on your tax return. But it depends. And there's three classifications for this real estate investment world. And if you screw it up, you're going to get audited. It's not going to be pretty. Now let's talk about these three classifications. The first one, and a lot of people will put this on their tax return and CPAs not familiar with this strategy will say, oh, you're not the property manager, you bought a rental property. You must be a passive investor. So let's check the box. Passive investor. And if you're going through TurboTax, you might check that box. Now that's classification number one, passive investor. And if you're a passive investor, you can only deduct those losses, those losses from all those rentals against passive income, which kind of is crappy. We don't want that. The second classification is that of an active investor. And if you check that box, you can deduct up to $25,000 of those losses against your other income. So I've got losses, they're going to kick out 25 grand, that's cool. Or more. But I can deduct these 25,000 in losses against W2 income, S Corp income, other income, I can deduct this 25,000. Now if I make more than 150 grand AGI some accountants go, well, you make too much money, you don't get the loss write off. Whoa, whoa, whoa. I still want you to track all those expenses because you're going to buy rentals next to grandma in Minnesota and when you go visit, that's a write off. So there's a lot of benefits here to tracking those losses because you don't lose them, they go into a bucket and this carry forward bucket of losses, you're going to keep those. And when you sell any rental property, you can dump them out. So this is a really wonderful thing to do. And a lot of people don't think that tracking the expenses is worthwhile, but it's delayed gratification. You're going to get these losses. So all my clients are active, no matter what. I check the box. Active. Because to qualify as an active real estate investor, all you have to do is be making decisions. That's it. You can be sitting on an island, drinking a Mai Tai, watching the beach and la la la, and be on a phone call going, yes, sell, yes, buy, no, get rid of my tenant, whatever, and you're in business. You can have property manager in the whole nine yards. Now, the creme de la creme is if you're a real estate professional, then you can deduct all those losses. And to qualify, it's a two part and really kind of a three part test. So here's the three tests. Number one, primary occupation. If you're going to qualify or your spouse as a real estate professional, their primary job has to be in real estate. Now they could be a part time pharmacist, but they got to be able to show they're spending more time doing real estate than they are being a pharmacist. That's number one and number two. And you have to meet both. You have to do real estate at least 750 hours a year, which is about 14 hours a week, two hours a day. You're either managing your rentals, buying more rental property, analyzing your profitability. You're doing, you're a realtor, you're a contractor. You don't have to be a licensed realtor or contractor. You just have to be doing real estate all day long, fix and flips, rehabs, wholesaling, working in the real estate industry two hours a day. Now, once you meet those two tests, there's the third one, which a lot of people gloss over. It's called material participation that you're involved in the real estate more than just sitting on a beach drinking a Mai Tai. And there's seven tests under this material participation. I've sat across the table from an IRS agent and fought this out and won. In fact, I'm, I've won every time. But I've got to make sure my clients actually meet the criteria before I go in and get crucified by an IRS agent. But these seven material participation tests, they're actually pretty easy to meet. They're not as onerous or hard as the 750 hours. And you can have property managers and still meet the material participation. But you want to make sure you meet these three things. Then you are, you are in real estate professional heaven. Now all those losses are a direct deduction against your other income. Now one example. Wrap it up. So if I've got, I've got this woman, she's awesome. She's a, an attorney in Southern California and, and she's a prosecutor and she does like, and I shouldn't say she's a prosecutor because she is in the civil world. She doesn't work for a city as a criminal prosecutor, but she is a plaintiff attorney. I guess you would say she makes great money, say two to 300 grand a year. Her husband is a stay at home dad. He's a realtor. He's a licensed broker for loans and they manage four or five rental properties. And he's a great dad. He's awesome. And they found a sweet balance in the relationship. Now it could be the husband, stay at home mom, the stay at home dad, but someone's got to have a W2 and some benefits and a lot of income to help support this process. Then the other spouse qualifies as the real estate professional. Now all their rental losses can be used against her income on her S corp as an attorney. So she doesn't have to be a real estate professional as long as she's married to one. So that's why I'm setting up a website called website called taxmatch.com if you send me your personals, I'll post it and we'll get you hooked up with the perfect mate. I'm just joking, I don't do that Anyway. But the fun part here is you can strategize as a married couple and if you're out dating, I'm going to put you on dating restrictions. So call me and I'll tell you who you can date. But this is a fun topic and it's a really powerful topic for my real estate professionals, my real estate investors and something to work towards. I talk about in my book the what your CPA isn't telling you or grab it. Is it right there. I've got to show them on screen because this is a good book. It's right over here on the table. And again, studying up on this makes you the captain of your own ship so that you can better manage your professionals. Here we go. What your CPA isn't telling you. Now this is big because it's a new door that you go through and you learn all these things, then you can ask your accountant, hey, why am I not a real estate professional? Shouldn't be working towards that. And if they look like a deer in headlights, you got the wrong accountant. And if you're doing this on Turbo, that's cool. But the more your business grows in your investments, maybe upgrade and get a accountant that knows what they're doing. So probably a longer video than I wanted. But this is very, very powerful and in my accounting firm and law firm, bringing it back full circle. I've been doing this for 20 years and we're not expensive, we're moderate. And I'm just saying if you're buying rental properties, let's make sure you have the right entities to hold them in the right state and it's affordable. And your accountant is coordinating this on your tax return. It's a perfect match, just like maybe your marriage so that you can qualify as a real estate professional. Anyway, know the rules, study up on it. And get to my website if you want to get my Tax and Legal Library lifetime membership. I've been shooting videos every year for seven years and you can access longer videos on each one of these topics or more. Study up. Then go talk to your professional and hit a home run. See you. Thanks so much for watching that video and I want to be your source for tax and legal strategies. It's hard enough to live the American dream without being out on the web on Google, trying to find answers to complex questions and just clicking a mouse, hoping you got it right. My team and I want to be a huge resource to you, the law firm, accounting firm, my education resources on my site. Please continue to follow these strategies. I know they'll save you thousands. Now click here if you want to be a part of my newsletter. It's awesome. Weekly updates and deadlines and strategies and tips. Also, subscribe to my YouTube channel. You'll love it. 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