Achieving Professional Real Estate Investor Status to Reduce Taxes
For high-income investors, obtaining real estate professional status, or REPS is an effective tax strategy. Your tax exposure will become very little, and you can save more dollars when you claim REPS. By deducting considerable passive losses, such as depreciation from real estate operations, you might be able to lower your taxable income. That is the case when you are fulfilling the criteria of being a real estate professional.
What is Real Estate Professional Status or REPS?
Anyone who meets the requirements can claim to spend most of their time working on real estate and associated tasks by using the designation “real estate professional status” or REPS. That is one of the unique advantages provided by the legislation to promote certain activities. If real estate is your major line of work, you can file for REPS.
Requirements To Claim REPS
Following are the conditions you need to fulfill if you are pursuing REPS:
- Your real estate business accounted for more than half of the personal services you provided throughout the tax year.
- During the tax year, you put in more time than the required 750 hours in real estate trades or companies.
- Actual involvement in these real estate ventures
Necessary Elements to Know Before REPS Qualification
To be eligible for REPS, you must pass all three tests—the over 50% of the time test, the 750-hour test, and the material participation exam. You can attempt these tests only once a year. You can meet the requirements to be a real estate professional in some years but not others. Because of this, the same real estate activity may result in passive losses in some years and non-passive losses in others. Let’s examine these circumstances in detail.
What Activities Will Make You Eligible (Test no.1)?
The definitions in the Internal Revenue Code are comprehensive. Any of the following activities would qualify in accordance with IRS Code Section 469(c)(7):
- Development and renovation of real estate
- Building and reconstruction
- Purchasing and converting properties
- Rental and management of the real estate
- Leasing, broking, or other related activity
- What Steps you Should have to Take for Time Test (Test no.2)?
Are you spending more than half of your time working at another employment? It will be challenging to obtain real estate professional certification. Additionally, you must put in a minimum of 750 hours in the real estate industry. A large portion of this must be spent on ongoing property management tasks.
- What is Material Participation (Test no.3)?
Simple active involvement in managing real estate assets is known as “material participation.” If you purchase and lease commercial buildings or flats while managing these assets on a daily basis, you could be eligible.
What You Can Get Through REPS?
Real estate professional status allows you to transform passive losses into deductible ordinary losses. REPS might drastically reduce your tax obligation if you invest in rental real estate. You can reduce your tax bill from 35% to 15% or even less.