If you are a couple where one spouse is a high-earning professional, such as a doctor or a lawyer, and the other is involved in managing the family's real estate investments, then this post is for you. This scenario can lead to a significant tax advantage for the couple, particularly if the spouse engaged in real estate management qualifies as a Qualified Real Estate Professional under the tax code.
So, what exactly is a Qualified Real Estate Professional (QREP)? In simple terms, a QREP is an individual who spends more than 50% of their time actively engaged in the real estate trade or business, and who meets certain additional requirements. If one spouse is a QREP, it can provide several tax benefits for the couple, especially if they own rental real estate properties.
The primary benefit of having a QREP in the family is the ability to use rental real estate losses to offset other forms of income, such as the high-earning spouse's W-2 income. If the managing spouse qualifies as a QREP, they can deduct losses from their rental properties against the high-earning spouse's income without being subject to the passive activity loss rules. In other words, the couple can take advantage of a full deduction for the losses incurred in their rental properties, even if the high-earning spouse is not actively involved in the management of those properties.
Additionally, the couple can take advantage of the ability to carry forward unused rental real estate losses to future tax years. If the couple's rental property generates losses that exceed their taxable income in a given year, those losses can be carried forward to future years, which can help to offset taxable income in those years.
For a deep dive into the qualifying rules and links to still deeper content check out What Are The Rules for Qualifying as a Real Estate Professional?
The benefits of having a QREP in the family can be significant for high-earning couples who own rental real estate properties. With the ability to use rental real estate losses to offset other forms of income, the option to carry forward unused rental real estate losses, and the potential to defer paying taxes on gains from the sale of rental properties, becoming a QREP can be a smart financial move for the managing spouse.