Author Topic: Real Estate Professional tax loophole and QJV option question  (Read 684 times)

Gary123

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Real Estate Professional tax loophole and QJV option question
« on: October 11, 2018, 01:54:28 PM »
My wife and I have successfully used the Real Estate Professional loophole to realize loss (due to property depreciation allowances) for many years.  She is the qualified real estate professional (more than 750 hours annually in the business) while I have a significant W-2 income.  Our annual federal income taxes are reduced significantly by subtracting those substantial “losses” against my active income.

My question is whether we can use the QJV (Qualified Joint Venture) option while filing our taxes without jeopardizing the real estate professional loophole normally filed as a partnership.  The H&R Block software allows it but that doesn’t mean the IRS will as well.  I understand the QJV simply divides the business income between the married couple to reduce the need to fill out other forms.

Any help is welcome. 

By the way, if you are considering using the real estate professional loophole, here are the three most common mistakes that will trigger an audit and significant fines;

1. The “qualified real estate professional” isn’t really fulltime so also works at another job, is enrolled in school or has other time obligations making the minimum hours in real estate required unlikely.

2.  You use a management company to manage your rentals.  Seems obvious to me but I have read many cases of people who hire a property manager than claim to the IRS they spend all their time managing the properties.

3.  Improbable due to only a few rentals or distance from residence.  Many audits that turned into court cases the taxpayer lost seem to involve a doctor and his wife pretending she is working fulltime to manage one or maybe two vacation properties that are hours away from their home.  Another common mistake is too few properties.  I would guess the minimum is around 5 or 6 properties to manage yourself to credibly claim it is a full time job.

Johnny Aloha

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Re: Real Estate Professional tax loophole and QJV option question
« Reply #1 on: October 12, 2018, 10:44:09 AM »
I'm an RE investor with several CPAs in the family.  This is a complicated question.  I recommend paying a CPA/tax strategy for an hour or two to get a professional (and defendable) opinion.

Wile E. Coyote

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Re: Real Estate Professional tax loophole and QJV option question
« Reply #2 on: October 12, 2018, 11:34:12 AM »
I agree that reaching out to a professional to walk through all of the requirements makes sense.  Are you sure that you meet the requirements to elect to be treated as a qualified joint venture?  You can't count your spouse's hours for purposes of the election, you both must materially participate based on your own hours.  In addition, you can't make the election if the business is operated through an entity such as an LLC or partnership.  If you are not operating through an entity, you may want to consider the liability protection that could offer, assuming that this is doable with whatever financing you have.

That all being said, I don't see why making the election would impact the determination of whether your spouse is a real estate professional.  That analysis is made based on her hours/activities in the real estate business.  If she materially participates in the loss making real estate activities, then she should be OK whether the loss making activities are in a partnership or a qualified joint venture.

Gary123

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Re: Real Estate Professional tax loophole and QJV option question
« Reply #3 on: October 14, 2018, 07:17:58 AM »
Thanks for the responses, good food for thought.

Yes, we do qualify for the QJV option but I also was having trouble identifying the upside.  We don’t run the rental properties through our LLC and both material participate.  In fact, I get all the jobs my wife doesn’t want to do!

And yes Mr. Aloha, we do plan to finally get professional tax advice next year.  Unfortunately, those who came highly recommended in the past were not really that helpful.  Commonly you meet the CPA who is very knowledgeable but when taxes are prepared it is a less experienced spouse or assistant.  We experienced this twice in the past 20 years so have done them ourselves as the Real Estate Professional is not a common loophole apparently where we live.

clutchy

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Re: Real Estate Professional tax loophole and QJV option question
« Reply #4 on: October 26, 2018, 01:55:02 PM »
don't call it a loophole.  It's the tax code it's not a loophole. 


It makes people think you're cheating on your taxes when you're just following the law.

Gary123

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Re: Real Estate Professional tax loophole and QJV option question
« Reply #5 on: November 02, 2018, 12:03:35 AM »
Thanks Clutchy, good point.

robartsd

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Re: Real Estate Professional tax loophole and QJV option question
« Reply #6 on: November 02, 2018, 04:59:02 PM »
don't call it a loophole.  It's the tax code it's not a loophole. 


It makes people think you're cheating on your taxes when you're just following the law.
I thought that's what loopholes were - laws that benefit a fairly narrow demographic. The word "loophole" implies that the lower tax burden is unfair (to other taxpayers) not that it is illegal.