There are significant tax benefits for investors who can qualify with the IRS for real estate professional status. Of course, these benefits do not come without trade-offs and a necessity for careful planning. To qualify as a Real Estate Professional for tax purposes, a taxpayer must meet a two-part test. To read more information regarding IRS investor classifications click here:

  1. The taxpayer must spend the majority of their time in real property businesses
  2. And the taxpayer must spend 750 hours or more in the real property business and rentals in which they materially participate

There are negative implications to achieving the IRS status of real estate professional and the associated tax benefit. If you are considered a Real Estate Professional, the IRS considers your short-term gains and income as ordinary income.  This income will be subject to self-employment tax.

To mitigate the increased tax exposure for real estate investors that are considered real estate professionals, S-corporations can be incorporated into their real estate portfolio. To reduce your self-employment tax bill, you can create an S corporation and hire yourself as an employee. You pay yourself, who is classified as an employee, for a reasonable wage for your work. If there is profit left over at the end of the year, it is characterized as a distribution rather than wages. Self-employment tax is only paid on wages — not on the company profit which results in significant tax savings. Real estate tax planning and industry financial expertise is critical in this area to achieve tax benefit; more on S-Corporations here:

Incorporating the real estate professional status and S-corporations can be great tax planning tools if they fit your investment and financial profile.

Tax benefits and incentives should not drive overall investment portfolios and strategies.  Reach out to our team regarding any questions about the Real Estate Professional Status or establishing a first-rate comprehensive tax strategy that is tailored to your real estate portfolio.

Camuso CPA PLLC’s focus and specialization delivers a unique perspective on best industry practices to provide the most value to clients.  Contact us today for Charlotte financial and tax planning and get your finances in order: