E26: Maximizing Tax Benefits Through Real Estate Professional Status with Thomas Castelli

Taxes play a crucial role in our financial landscape, yet they often receive little attention and recognition for their economic impact. Unless you're an ultra-organized individual, most people procrastinate until the end of the year or early the next year to compile their tax information and hand it off to a CPA. The CPA then determines what needs to be paid, and once it's settled, it's quickly forgotten, much like going to the dentist to fill a cavity. People simply don't want to deal with it and fail to give it the attention it deserves. This is precisely why we are dedicating ample time to discussing taxes here. 

Last week, we had the pleasure of hosting Thomas Castelli, a partner at Hall CPA. Today, he discusses real estate professional status and how to qualify to take rental losses against other income. He provides a comprehensive overview of the rules and strategies around real estate professional status, to help you  learn how to leverage your status and maximize tax benefits.

Here are some topics from today’s discussion:

• What is the real estate professional status?
• How to qualify as a real estate professional
• How bonus depreciation works
• Evaluating the hours to qualify for real estate professional status
• The two different types of grouping

 

Episode Highlights:

[03:33] What is the Real Estate Professional Status?

The real estate professional status allows real estate investors to treat losses from rental real estate activities as non-passive losses, allowing them to use those losses to offset other "active" income like salary, self-employment income, partnership income, S-corporation income, and more. To qualify as a real estate professional, the taxpayer must spend more than 750 hours per year working in real property trades or businesses and more time in real estate than any other trade or business.

[13:31] How to Qualify as a Real Estate Professional

There are two main requirements to qualify as a real estate professional:

1. The taxpayer must spend more than 750 hours during the year in real property trades or businesses. This includes activities like developing, constructing, acquiring, converting, renting, managing, or brokering real estate.
2. Real estate activities must comprise more than 50% of the taxpayer's total personal services that were provided during the year. This is determined based on hours spent. The hours that are going to impact the day-to-day operations of your property are typically the hours that will count. Research time, education time and travel time do not count towards real estate professional status. Another type of hours that don't count is the "investor level" hours where you’re not self-managing the property. In other words, you're not involved in the day-to-day operations, such as bookkeeping, keeping records, and reviewing property management statements.

[22:26] The Two Different Types of Grouping

There are two main types of grouping for real estate professionals:

1. Real Estate Professional Grouping: This allows a taxpayer who qualifies as a real estate professional to treat all of their rental real estate activities as one activity when applying the material participation tests, rather than having to meet the tests for each separate property. This makes it easier to qualify the rental losses as non-passive.
2. Section 469(c)(7) Grouping: This allows a taxpayer to group a rental real estate activity with a trade or business activity (like an S-corp) if they have common ownership and both are materially participated in. This treats the rental losses as non-passive so they can offset the income from the other business. This avoids having to separately qualify as a real estate professional.

Resources:

Tax Smart Investors

https://thomascastelli.com