Welcome to the first of several blog posts covering topics that directly or indirectly impact the real estate community. I recently attended a Real Estate Council breakfast and speaker, San Antonio Mayor, Ron Nirenberg, stated that Bexar County had the 7th largest population growth in the nation from 2016 – 2017. It is projected that this rapid growth will continue for years to come. Real estate-related businesses will likely experience significant growth as they help build infrastructure for our budding population. My goal is to familiarize you with some planning opportunities that may reduce the tax impact on your business and help you plan for future growth.
In my inaugural blog, I’d like to discuss the real estate professional election. It is typically one of the first topics I think of when working with clients in the real estate industry. For some taxpayers, taking advantage of the election under the right circumstances can result in substantial savings. Generally, the IRS treats income from real estate activities as passive and passive losses are only deductible to the extent you have passive income from other investments. Additionally, net income resulting from your real estate activities is subject to the 3.8% net investment income tax.
A taxpayer that qualifies as a real estate professional under Internal Revenue Code Section 469 can use the losses generated from real estate activities against all other types of income–not just passive income. In addition, the income generated from these real estate activities for materially participating real estate professionals is not subject to the 3.8% net investment income tax.
So you’re probably wondering, “How do I qualify as a real estate professional under Section 469?” To be considered a qualified real estate professional, you must pass both of the following tests:
1. More than 50% of your personal service time for all trades or businesses must be performed in real property trade or business activities in which you materially participate.
2. You must spend more than 750 hours in real property trade or business activities in which you materially participate.
Navigating the rules and regulations established by the IRS can become ovewhelming at times. ATKG is always available to provide advice and help you find the best strategies that fit your personal goals. Please call me if you’d like to learn more about the real estate professional election.
Keeping it real as always,