Real Estate Professional Designation Basics
Whether you’re an experienced real estate investor or just getting your feet wet, understanding what the Real Estate Professional (REP) designation is and how you could potentially utilize it is just another important tool in your “box.” Additionally, as a real estate investor understanding how cost segregation and the real estate professional designation go hand in hand can be the difference between owing Uncle Sam thousands in taxes or saving. If you’re just starting out in real estate investing, you might not qualify as a REP. I will talk more about the qualifications later in this post (so keep reading!). However, keep in mind that having a REP designation should be on your goals list. As your career progresses, the tax benefits are advantageous!
Understanding how cost segregation and the real estate professional designation go hand in hand can be the difference between owing thousands in taxes or saving.
Now, if you are already familiar with what the REP designation entails, or heck you may already take advantage of it – great! Keep on reading though as I will further explain how REP and cost segregation is the perfect recipe for reducing your tax liability even further! So what exactly is a REP designation? It’s an IRS tax classification for tax payers who put in a certain amount of hours each year in a real property business. Qualified activities include The qualifications are as follows:
You spend more than 50% in a real property business or businesses
750 hours or more is spent in that real property business or businesses
So what’s great about having a REP designation? Unlike a non-REP investor, you can deduct any and all losses against any income on the Form 1040! For real estate investors who aren’t REPs, deducting their rental properties depreciation and losses against their W2 income gets tricky. To further elaborate, the depreciation captured through cost segregation is considered a passive loss and can only be used to offset passive income. For a non-REP this could limit the ability to take full advantage of cost segregation losses. As a REP, you can use cost segregation’s losses against ordinary income! One workaround is, if you’re married, file jointly, and one spouse doesn’t need to work a W2 job. If they qualify, have them become a REP! You can use their losses to deduct against the W2 income. Winning!
The IRS has seven tests to determine material participation. Once you’ve proven your active involvement, you will be eligible to perform a CSS on your property. This would be extremely beneficial to you as a vacation rental owner as it will massively offset your yearly profit through the accelerated depreciation that you can claim as a yearly expense. Since vacation rentals can show massive amounts of income, and therefore burden you with a larger tax bill, cost segregation provides the perfect “interest-free” loan from the government to defer your taxes and increase your cash-flow.
Unlike a non-REP investor, you can deduct any and all losses against any income on the Form 1040.
Conclusion
We always tell clients and prospects to check in with their CPA or tax professional to ensure that cost segregation makes sense, as everyone’s financial situation is different. Looking for a deeper dive into cost segregation? Check out our blog post, What is Cost Segregation?
