Is W2 income unable to be depreciated in anyway, even if you are a real estate professional? If I buy rental properties for myself while working for a REPE, would I be able to reduce my taxable liability, or would I need to be paid through a 1099?
I understand you need to be a real estate professional to depreciate ordinary income, but does the W2 disallow that?
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It is my understanding that you need to spend at least 750 hours in a year on management activities related to your rental properties in order to do so. This is based on something a tax lawyer was telling me that I may have misunderstood, but it did help me understand why so many development firms add management arms as they get bigger (so the principals can get those sweet sweet tax losses against their earned income).
I definitely spent 30-40 hours per week on my own properties this year. I can make a log to have proof, but I just want to make sure there aren't any other requirements.
One other thing I heard is that you need to have more than 50% of your hours come from real estate, not sure how I can prove that though since hours really aren't recorded for W2. Is my understanding correct? As an employee, my W2 hours do not count towards real estate activities, so if this were to be the case I'd need to work 40+ hours on my own properties to qualify.
This article is focused on doctors, but does provide some insight into the process/tests involved.
https://www.whitecoatinvestor.com/real-estate-professional-status-reps/
I mean if you receive a 1099 you will likely be able to use that depreciation and other deductions.
How do you get time to do this and whats your strategy?- I'm looking to have a similar set up but incoming IB SA
If you work a full-time W2 job (even in real estate), the likelihood that you meet the required "real estate professional" qualification to apply real estate losses against active (i.e. W2) income is very unlikely. From my understanding, this is heavily scrutinized by the IRS, so I would be careful making a personal judgement without receiving counsel from a tax attorney or CPA familiar with the rules.
To gain the benefit, the easiest approach I have seen is to one spouse as a RE Professional and the other is the high-earning W2 employee.
The laws around this used to be far more lax, which was why there were so many tax shelters in the 80s where RE investors and developers were syndicating equity from high-earning doctors, lawyers, etc. in order to provide losses to shield their income. The IRS closed this loophole, which was a major contributor to the CRE recession experienced in the late 80s.
If you want to qualify, your best bet is to utilize the "short-term rental loophole", which I won't get into here but is searchable online. Much easier bar to clear than the traditional Real Estate Professional Status.
Is your W2 income working at a fund you are invested in and managing?
Not sure I am following your question. Can you restate?
Speak to an accountant. Don’t ask an anonymous forum.
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