real estate professional

We’ve talked a lot about the more aggressive IRS audits for real estate professionals and real estate investors. I received an email from one of the TL Community members who had just gone through an audit of cell phone usage. And, we have warnings now of increased audits for small businesses, especially Sole Proprietorships, and anyone who has capital gains.

My husband, Richard, gets a call almost every single day from someone who has just gotten an IRS notice or just gone through an IRS audit. And, at the same time, my clients haven’t gotten audited. None of them.

I absolutely love getting the chance to interact directly with my TaxLoopholes clients (and some Diane’s Mastermind clients and my tax firm, Diane Kennedy’s Tax Services clients) when there are new tax issues happening.

And that’s exactly what happened this past weekend. We spent a lot of time going over the Real Estate Professional audits and the distinctions that the IRS is making. There is a lot of confusion among tax professionals as well on this one.

There are TWO requirements to taking the real estate passive loss deduction against other income if your income is over $150K:

A year ago, I would have told you that you needed to avoid real estate dealer status and that you should always take advantage of the capital gains exclusion for primary residences.

Boy, things have changed. And as commonly happens when law and policy changes rapidly, not all of the loopholes are thought through. In fact, there are a couple of loopholes right now that I’m not sure Congress and the IRS intended. But, nevertheless - there they are.

For the past 6 months or so, we’ve been reporting on the increase in IRS audits of Real Estate Professionals. And at the same, I offered a free review of tax returns to see how much my full-service tax firm, Diane Kennedy’s Tax Services, could save them.

Not surprisingly, we’ve been flooded with tax returns. I know Richard (my husband) had 90 phone calls to return yesterday. (He didn’t make it, but he’s going to keep working to get all caught up through the weekend.)

It’s probably the biggest understatement of the year to say that real estate has been hard hit this year. Some investors got out at the right time and others had enough cash to carry them through the tough time. Those are the people who are jumping back into the market with both feet.

Others didn’t have it quite so well and are trying to find ways to recover or maintain.

We’ve been posting about the increasing number of IRS audits against Real Estate Professionals and the hard stand they have been taking. Some of the horror stories we’ve heard:

(1) Real Estate Agents denied the REP status because they are not brokers

(2) Hours spent looking at property not allowed because this is considered an “investment”

(3) CPA charged with preparer penalty because he relied on client’s information for REP status

and the list continues.

Real Estate Professional status is definitely a red flag audit condition, especially if you live in California. If you are currently taking this status, or are planning on it, here are some of the things that you must know.

Three years ago the Real Estate Professional status was one of the best loopholes available. Now, it’s a red flag for an IRS audit. Learn about the new climate for real estate loopholes in this week’s Online Workshop, available exclusively for First Class Lounge members.

Given the interest in the past few days regarding Real Estate Professionals, I thought I’d go through what it is, and why it can make such a difference in the amount of tax you pay.

If you make $100,000 or less and have real estate losses, you can deduct up to $25,000 of those losses against your other income. If you make over $150,000, you can’t deduct any losses. But if you qualify as a real estate professional, there is no limitation on the amount of losses you can take. In order to be a real estate professional, you have to spend more time in real estate activities than any other activity and a minimum of 750 hours. And, the IRS is aggressively attacking Real Estate Professional status.

Read on for strategies for qualifying as a Real Estate Professional.

Three years ago I’d have told you that if you paid too much in taxes, you needed to buy more real estate. Today, that advice is just flat wrong if you’re subject to AMT (Alternative Minimum Tax)! Now, it’s even worse if you’re a real estate agent claiming the real estate professional loophole.

Agent Beware! The IRS is Looking for You!