Watson CPA Group - Knowledgebase

Knowledgebase

Real Estate Pro's
Why designate myself as a real estate professional?
By Jason Watson (Google+) Ok- let’s presume that you have a rental loss. How does it affect your tax return? Rental income is typically considered passive, meaning that you are not directly earning the income as you would with a job. Passive losses may be deducted from non-passive income such...
06 Jan, 2013 Views: 0 Comments: 0
What is the definition of real estate professional?
By Jason Watson (Google+) To be a real estate professional, an individual must spend the majority of his or her time in real property businesses which include development or redevelopment, construction or reconstruction, acquisition or conversion, rental, management or operation, leasing and /...
06 Jan, 2013 Views: 0 Comments: 0
How do I record the hours spent as a real estate professional?
By Jason Watson (Google+) Taxpayers are required under Income Tax Regulations Section 1.469-5T(f)(4) to provide proof of services performed and the hours attributable to those services. Here is a snippet regarding proof for material participation, and the same process can be used for...
06 Jan, 2013 Views: 0 Comments: 0
Are rental activities always passive activities?
By Jason Watson (Google+) Generally Yes. A rental activity is a passive activity even if you materially participated in that activity, unless you materially participated as a real estate professional. An activity is a rental activity if tangible property (real or personal) is used by customers...
06 Jan, 2013 Views: 0 Comments: 0
What is active participation versus material participation?
By Jason Watson (Google+) For rental properties, the issue is nearly moot since active participation relates only to rental real estate activities and is a less stringent standard than material participation. As long as a taxpayer participates in management decisions in a bona fide sense, he...
13 Jan, 2013 Views: 0 Comments: 0
What are the general tests for material participation?
By Jason Watson (Google+) Ok. Here we go. This is where the IRS is starting to crack down on what they deem gaming the system by self-determined real estate professionals. There are several requirements for material participation, and satisfaction of any one test will allow you to be...
06 Jan, 2013 Views: 0 Comments: 0
Are there specific material participation tests for real estate professionals?
By Jason Watson (Google+) Not really. The general seven tests as explained in a separate FAQ are the main factors, but the IRS Audit Technique Guide (ATG) specifically calls out material participation for real estate professionals. Here is the word-for-word copy of that section- A real estate...
06 Jan, 2013 Views: 0 Comments: 0
If I meet the 750 hour test, don’t I also meet the 500 hour material participation test?
By Jason Watson (Google+) No. This is a common misconception, and there are some scenarios that can get you in trouble. For example, many license real estate agents can easily prove the 750 hour test for being a real estate professional. However, they do not spend enough time on their own...
06 Jan, 2013 Views: 0 Comments: 0
What activities count and don’t count?
By Jason Watson (Google+) In general, any work you do in connection with an activity in which you own an interest is treated as participation in the activity. Some of the activities that count towards your hourly requirements include collecting rent, bookkeeping, advertising, maintaining legal...
06 Jan, 2013 Views: 0 Comments: 0
Do I need to group my rental activities together?
By Jason Watson (Google+) Yes. Otherwise you will need to prove 750-hour rule for real estate professional for each property, including the proof of material participation in each property. That’s tough. The election is simply a statement that is attached to your tax return. And under Revenue...
08 Jan, 2013 Views: 0 Comments: 0
Are there downsides to the real estate professional designation?
By Jason Watson (Google+) Yes. But the downsides are obscure. If you have other passive income you might want to keep your rental losses passive to offset this income. For example, you are an investor in an investment partnership that loses money and you have rental properties which make good...
06 Jan, 2013 Views: 0 Comments: 0
What are some of the IRS tricks to deny my real estate professional designation?
By Jason Watson (Google+) The IRS asks auditors to consider several indicators which suggest the taxpayer did not materially participate. Some of the issues are- Location: The distance between you and your rentals can suggest how much participation could be performed. Naturally, the further...
06 Jan, 2013 Views: 0 Comments: 0
What are some of the tax court cases for real estate professionals?
By Jason Watson (Google+) Here is a snapshot of some issues the Tax Court has recently dealt with. TC Summary 2012-94 (Wallach) Taxpayer was a real estate agent who attempted to deduct several travel expenses including Hawaii and Lake Tahoe. He attempted to claim the travel was for...
06 Jan, 2013 Views: 0 Comments: 0