Florida is a major real estate state with investments in properties increasing every year. However, as with any other kind of capital gain there are always tax requirements on those kinds of investments. Luckily there are tax perks or benefits for real estate professionals, a term used by the Internal Revenue Service (IRS) to provide those who meet the specific requirements provided by the IRS.
What is a real estate professional for the IRS?
A real estate professional, as determined by the IRS, is one who can meet the following requirements. First, a person must spend at least 750 hours in any given year, from January 1 to December 31, participating in “real property trades”. Real property trades include development or redevelopment work, construction, property acquisition, rental management, operations, or being involved with a brokerage trade or business. Aside from the minimum hour requirement, the IRS also requires that the real estate involvement be the primary job of the individual. For example, if Joe has a consulting business in Miami, Florida, and spent 1,200 hours on his consulting business, then he would need to demonstrate that he spent at least 1,201 hours on his real estate work to qualify for the tax benefits.
How can someone classify as a real estate professional?
To report to the IRS and be classified as a real estate professional for tax purposes a person must keep a log of their hours spent on real property trade business. No specific method is required; however, the better one can keep a clear record of the hours spent, the easier it will be for the IRS to determine that such classification is warranted. However, all time that is logged or recorded should include the date on which the activity was done, a description of the activity performed, the duration of the activity, and the address of the related property to which the activity was done for. It is always recommended that evidence of all time spent on activities be kept, such as emails, text messages, or written testimony of others that they spent the alleged time on any given activity. This is done so as to ensure that in the case the IRS audits any reported time entries they can be substantiated and make the audit process easier.
What are the tax benefits of being a real estate professional?
As a real estate professional, the rental depreciation and losses of the given year can be deducted against any other type of income such as the income that Joe in the example above would have made from his consulting business. To further expand on the Florida example, if Joe has taxable income of $100,000 related to consulting service fees but also has $20,000 in rental loss (including depreciation), without the real estate professional classification Joe would pay taxes on the $100,000 from the consulting business and the $20,000 loss would be trapped until it can be used to offset future real estate income. However, with the real estate professional classification, the tax net loss of the rental properties can be deducted from his consulting income, hence if $20,000 is rental tax loss in the year Joe made $100,000 then he would only have a taxable income of $80,000 rather than the full $100,000. This is a tremendous tool used for tax deduction purposes that is not as commonly used as it could be. If you think that you can classify as a real estate professional speak to a tax attorney to discuss how rental properties that you own can help you gain the great benefits that come along with the classification.