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Tax Advantages For Real Estate Professionals?

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Tax Advantages For Real Estate Professionals?

  • 26 May 2023

Real Estate Professionals

There are various tax advantages to owning real estate, but real estate professionals may qualify for extra advantages. Although obtaining real estate professional status (REPS) may appear burdensome, qualified owners might get extra benefits, such decreasing their taxable income by deducting large losses from real estate operations, like depreciation. Owners of real estate should review the requirements and check their eligibility.

Who Is A Real Estate Professional?

According to the IRS, three requirements must be met to be considered a real estate professional:

Your real estate business accounted for more than half of the personal services you provided during the tax year.

During the tax year, you put in more time than the required 750 hours in real estate trades or businesses.

Participation in these real estate ventures on a material level

You can see that the purpose of the aforementioned requirements is to guarantee that only individuals who spend the majority of their time are likely to receive REPS.

What Kinds Of Activities Fall Under REPS?

The Internal Revenue Code contains extensive definitions. Any of the following activities would qualify by IRS Code Section 469(c)(7):

1. Development and renovation of real estate

2. Building and reconstruction

3. Purchasing and converting properties

4. Rental and management of the real estate

5. Operations

6. Leasing, broking, or other related activity

It will be difficult to get a real estate professional certified if you work at another job more than half the time. In addition, you must work in the real estate business for a minimum of 750 hours, the majority of which must be devoted to continuing property management duties.

Tax Benefits

Let us now understand the few Tax Benefits of Real Estate Professionals.

Active vs. Passive Income

The IRS distinguishes between two categories of income:

Active income is cash earned through physical labour. These are often W-2 or 1099 wages.

Money earned through passive income is money made without working. It consists of rental income, earnings from investments, and interest on your savings account.

IRS Publication 925 also emphasises that as a real estate agent, you can offset all of your rental losses against your active income.

Amortization And Depreciation

Depreciation is the process of expending a tangible asset for its useful life, in our instance, buildings and upgrades. Simply defined, the IRS prohibits the purchase of a property for Rs.30,00,000 and the deduction of expenses totalling Rs.30,00,000 in the first year. For the property's life, you must space them out.

1. Land does not lose value, claims the IRS. As a result of its scarcity, its value never changes.

2. You can deduct your depreciation expense in one of two methods.

3. Straight-line depreciation: With this method, you deduct a specific amount annually for the duration of the property.

4. Accelerated depreciation: This allows you to pay a portion or all of the cost upfront rather than spreading it out over time.

The final component of amortization is intangible assets, such as loan closing fees. It is the item that you must purchase to complete the transaction. These costs can only be written off as straight-line depreciation.

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