Tax implication of real estate license on rental income

[DHenke555]

We have income from farm land rental.  In the past year I have obtained my real estate license.  How will that affect treatment of that income from a tax prospective?  What should I be documenting and watching for?

[NateTheGrEAt]

Hi DHenke555,

There shouldn't be an impact. Just keep reporting the farm rental as you have been. 

You may be thinking of the concept of a "Real Estate Professional", but 

1) Just having a real estate license doesn't make you a Real Estate Professional by IRS rules - there are several other substantial requirements. 

2) One of the main differences about being a Real Estate Professional is that your income/loss from rentals would be considered nonpassive. However, a rental of bare land with no services provided is not likely to generate a tax loss - there is no depreciation of land. So this may be largely a moot point for land rental. 

Hope that information helps!

[DHenke555]

Thanks for the response!!  We do have depreciation of a 82k drainage tile system that was installed 3 years ago.  Would that make a difference?

[NateTheGrEAt]

Does the land rental produce net income or a loss for tax purposes? (Look at Line 22 of your Schedule E in the column for the land rental)

Also, do you qualify as a Real Estate Professional? The requirements are:

• More than half of the personal services you perform in all trades or businesses during the tax year are performed in real property trades or businesses in which you materially participate.

• You perform more than 750 hours of services during the tax year in real property trades or businesses in which you materially participate.

If you do not qualify as a Real Estate Professional, this entire discussion is moot as simply having a real estate license (but not qualifying as a Real Estate Professional) does not change anything about the tax treatment of your rentals. 

Here is an earlier discussion about being a Real Estate Professional: Solved: Real Estate Professional status election (intuit.com)

[DHenke555]

The land still still generates a profit and I will not meet the 750 hours limit.  Next year I probably will.  Sounds like I should document that.....  How will that affect my tax filing?  Thanks for being so helpful!!

[NateTheGrEAt]

Just to be totally clear, to be considered a Real Estate Professional you have to meet both tests, not just one or the other. I don't know if you also have other employment or business interests, but the first part is often the hardest one to meet for someone who has other work outside of real estate. 

Documenting the hours you spend in real estate and any other employment or business is definitely a good idea in case of audit. 

When you are entering your rental property information in TurboTax, there will be a question that asks "are you a Real Estate Professional?" If you qualify, you can check this box to indicate that yes, you are. 

Passive income and nonpassive income are taxed at the same rate, so unless you have other passive income you are offsetting with the rental income, there would likely be no immediate change to your tax situation from being a Real Estate Professional and having a rental that turns a profit.