Real Estate Professional Status aka REPS is a fantastic way for Real Estate Professionals to generate wealth while investing in real estate. Why is that important and how does that apply to you as a Physician or High-income earner?
The short answer, if you claim Real Estate Professional Status (REPS) you can deduct your “passive losses” such as depreciation from your “active income” W-2 income/1099/K-1 etc. As a result, a person or couple claiming REPS can significantly decrease their taxable income and use the tax saving to reinvest in Real Estate… You can see how this can rapidly increase your net worth.
As a high-income earner, you have limited options for tax deductions so this option sounds amazing…. and it is amazing as long as you qualify…. Qualifying is the tricky part of REPS and the criteria for qualifying is strict….
If you plan on working full time then you will not qualify for REPS.
Working more than 20 hours a week? You might qualify but it will be difficult….
You will not qualify for REPS if you are single and working full time.
If you plan on continuing to practice Medicine or work in a professional field, achieving REPS will be very difficult….
So, what is REPS good for?
Real Estate Professional Status is a niche financial opportunity for High Income Earning couples where one spouse is not working, retired, or self-employed in a Real Property trade or business. Working in a Real Property trade or business allows one spouse to meet the below qualifications. If one spouse meets the below requirements then you as a couple can deduct your passive real estate losses from your jointly filed active income.
You qualify as a real estate professional for the year if you meet both of the following requirements.
- More than half of the personal services you performed in all trades or businesses during the tax year were performed in real property trades or businesses in which you materially participated. (This means you must work more in real estate than your primary occupation)
- You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated. (at least 15 hours a week)
Real property trades or businesses
A real property trade or business is a trade or business that does any of the following with real property.
- Develops or redevelops it.
- Constructs or reconstructs it.
- Acquires it.
- Converts it.
- Rents or leases it.
- Operates or manages it.
- Brokers it.
So, what are your options if you cannot qualify for REPS?
You can still invest in traditional rental real estate, build equity and cash flow over time…
Or…. you can invest in Short Term Rental Properties, enjoy your properties, build equity and receive great tax benefits while continuing to practice Medicine. You can receive many of the same benefits of REPS by owning and managing Short Term Rentals… (Check out this post). Short Term Rentals are a great way to invest if you are single, or in a relationship where both partners will continue to work.
Ps. If you are interested in Real Estate Professional Status and Long-Term Multifamily investing check out Kenji and Leti’s Course at Semi-Retired MD. This is a great course for Long-Term investing.
Below is link to the IRS regarding Real Estate Professional Status if you would like to check it out…