Strategies for reducing taxable income are especially important for those professions that allow earning substantial money because many rules that allow offsetting net losses do not apply to them. An effective solution in this situation would be to obtain real estate professional tax status. It gives those the opportunity to claim rental losses that will offset your active income.
Why Is It Important for Physicians to Develop Tax Strategies?
When filling out a tax return, a person indicates their active and passive income. All real estate rental activities refer specifically to passive income, unless you have received the status of a professional in the real estate industry. If you incur losses on your passive income, they can be covered from active income and deducted from the taxable amount. However, this applies only to those categories of citizens whose MAGI (modified adjusted gross income) is $100,000 or less. Physicians do not belong to this category for several reasons:
- Their income in most cases exceeds the permissible limit for PAL rules (Passive Activity Loss). It is set at MAGI $150,000, but doctors earn more.
- Since doctors have a stressful job, they often play in the best online casinos to take their minds off and relax. And this further increases their wealth thanks to the amazing winnings at the Automatenspielex casino automatenspielex.com/casino-spiele.
- There is a ‘doctor shortage’ in America, which means doctors have a better chance of finding good deals in the labor market.
How Real Estate Professional Status Saves Your Income
To benefit from rental losses, you need to turn passive income into active income. In this case, earnings restrictions will not apply. Even if your income from medical activities is high, you can use the declared losses to offset other taxable income. This becomes possible because the government seeks to encourage certain types of activities by creating some benefits for those who engage in them. The services in real estate are precisely one of these types of activities, and therefore, you can take advantage of this.
How to Become a Real Estate Professional
To qualify as real estate professional is quite easy if you really have some business connected with real estate. To do this, you must meet only 3 criteria:
- More than 50% of your total working time during the taxable year must be devoted to a real property business. At the same time, you can perform a variety of services within the framework of this business: construction, rental, management, etc.
- You must pass the real estate professional 750 hours test, proving that you spent at least this amount of time working in real estate in the taxable year. These time expenditures must be verified using any documents like appointment books, correspondence with clients, calendars, etc.
- You must prove material participation in the real estate business. This means that you must personally provide certain real estate-related services. The option of hiring a manager who deals with all these issues will not give you the status of a real estate professional.
Special Solution for Physicians
However, fulfilling these conditions for physicians is not so easy because more than 50% of your working time must be devoted to the real estate industry rather than medical practice. Not many doctors are willing to sacrifice their profession for the sake of reducing taxes. However, there is one extremely effective solution: your spouse can receive real estate professional status (REPS). And then you will indicate losses from rental activities in the jointly filed tax return.
Why REPS Is One of the Most Powerful Tax Tools
If you think this solution is too complicated to increase your income, calculate the benefits. REPS status will allow you to reduce your taxes from 15% to 35%. Considering the high salaries of doctors, this is a considerable amount. You can invest this money in real estate and expand your business. Moreover, various negative factors can be claimed as losses:
- Destruction of real estate due to weather anomalies;
- The need for expensive repairs;
- Absence of tenants for a long time;
- Rental depreciation due to different unfavorable factors, etc.
Thus, by documenting all these losses, you will be able to show that during the year, you were forced to invest additional funds in real estate activity. This amount will be deducted from your medical practice income and, therefore, will not be taxable.
Conclusions
To obtain REPS status, you do not need to pass any qualifying exams or obtain a special license. It is enough to prove that you spent at least 750 hours of your activity per year on issues related to real estate, and this constitutes at least 50% of your working time. Your reward will be a significant tax reduction and the ability to use this money to grow your business or something else.
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