Everyone, Eric Freeman here today, I'm going to talk to you about real estate
professionals, why it's important and how you can make sure
to make this work to your advantage when it comes to your tax liability.
So first, I'm going to talk about the two
big categories that are related to this first.
If you're a real estate professional.
And second, if you're really a passive investor.
And this is important because by default,
as a real estate investor,
you're actually treated as having passive income,
which means that your deductions related to real estate may be limited.
So really, if you can, you want to try and get into this professional category
so you can really get the most bang for your buck when it comes to taxes.
So to be a real estate professional, there's really
two main things that you have to pay attention to.
The first one is the hours, so you have to spend a minimum
of 750 hours in a real property, trade or business.
So if you're doing rental real estate,
this would qualify and this is on an annual basis.
The second requirement is that you have to spend more
than half your time in a real property, trade or business.
So this means if you do something else, if you have a full time job or another
part time job, you really have to know how much time you're spending in
both of them to see if you meet this requirement.
And it's an annual test, so you may meet at one year.
It doesn't necessarily mean you'll meet at the next year, and you want to make sure
that you're tracking these hours in case it ever comes into the question.
You have something to back up that you actually spend this amount of time.
Obviously, if real estate your full time job, it's a little easier to justify
and you may not need as much support, but just something to keep in mind.
So let's dig a little deeper into what the math actually
looks like here, because it doesn't seem that hard on the surface, right?
I mean, it takes a lot of time to find a property if you're managing it
yourself, doing the financing, all the aspects that are related to it.
But the reality is we have to kind of look at it
and see if it's actually possible to meet this,
especially when you're doing something else.
So first, total hours in the year, this is an important number.
So there's 8760 hours in a typical year.
And this is just for the total hours.
24 hours in a day, times three and 65.
So then, well, I hope you're all sleeping.
So we'll add in some sleep.
So let's figure that you're getting about eight hours of sleep
for 365 days a year that come out to just under 3000 hours.
Then if you are someone that has a full time job
and you're working 40 hours a week, 52 weeks a year,
that means that you're spending 2880 hours at your full time job.
This leaves you 3760 hours
that you have to spend in real property trades or businesses.
Now, of course, the important thing to note here
is that this doesn't include your vacation that doesn't include your downtime.
This doesn't include time with family.
So really, this is not
all hours that you're going to be able to use in a trade or business, but
what you want to make sure is that whatever hours out of this,
if you have a full time job, it needs to be greater than 2080.
So you have 3007 or 60 to really spend time
trying to figure out how you're going to spend those hours
that you can meet this requirement.
Obviously,
if you're able to lower your hours here, it makes it a little easier. OK?
So again, why it's important
to be a real estate professional is because as a real estate professional,
you can actually offset your other income with your real estate losses.
And I put losses in quotations because what's often
your taxable income is not necessarily your cash flow from real estate.
one of the great benefits.
So if you're a real estate professional, you have other income.
So you have other types of investment, income, interest, dividends.
Maybe you've sold another business, maybe you have wages of some sort.
You can use that those rental losses to offset that income.
And it's a huge benefit
if you're in the passive category of those who are not a real estate professional.
This could mean that you won't be able
to deduct those losses in any particular year, because
when it comes to the passive category, you can only offset other passive income.
If you have positive taxable income from one rental
and then you have a loss from another rental.
Well, then you could take that loss and offset the income over here.
But if all you had was this loss and you had a.
Full time job, you wouldn't be able to deduct that loss from the rental property.
So it's really important
for planning purposes to know what category you fall under.
There is actually a third category
that you may be able to fall under, and this is active real estate.
This is kind of a compromise between being passive and a real estate professional.
And essentially, what this means is if you're active in the day
to day of managing or owning the property,
so maybe you screen the tenants yourself, or at least you approve the tenants,
you're calling for repairs and you're really doing some of that day
to day stuff or you're managing someone that's doing that.
So potentially if you have a property manager,
you may still qualify depending on the fact pattern.
But the benefit of this is essentially
that you can deduct up to 25,000 against your other income.
Now there are phase outs and some limitations,
but basically you can get a partial deduction here.
So if you have more than 25,000 losses,
you may not benefit from all of it, but it's better than nothing.
So with that said, it's really important to know
which of these three categories you fall under and plan appropriately.
Thanks for watching everyone.
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