Landlords and Real Estate Licenses

Should Landlords Take the Plunge and Get a Real Estate License?

 

As a landlord, you've probably heard whispers about the tax advantages and other benefits of getting your real estate license.

What you've heard is true: the tax advantages alone can justify becoming a real estate professional.

However, if you have a full-time job or only own a couple of rental properties, the advantages are less clear cut.


Potential Benefits of Being a Real Estate Professional
Let's first examine the upsides of getting your real estate license.

If you qualify as a real estate professional, you can deduct any losses you suffer from your rental properties annually.

As a real estate professional, you're allowed to calculate this loss independently from your other income.

If you're only a landlord, you cannot make these deductions each year due to the passive income restrictions of the Internal Revenue Service.

Instead you can only deduct your losses after you sell the rental property.

As a real estate professional, you'll also avoid paying the 3.8% Net Investment Income tax that the IRS instituted in 2013.

This tax applies to single people with a gross income that exceeds $200,000 per year and couples that make $250,000 per year.

Even if you exclude the tax savings, many landlords find that they save money by acting on their own behalf during real estate transactions.

If you want to add properties to your rental portfolio, having your real estate license will allow you to quickly view properties that meet your criteria.

Also, when you buy property, you'll save part of the cost of the commission.


Qualifying As a Real Estate Professional
For tax purposes, you must meet the following criteria as a landlord and real estate professional.

  • As a real estate professional, you cannot have a full-time job outside of real estate.
  • As a real estate professional, you must devote over half of all of your working time to working on real estate business.
  • As a real estate professional, you must work at least 750 hours per year in the real estate business.
  • As a landlord, you must devote 500 hours per year to actively working as a landlord or find another legally acceptable way to demonstrate that you are an integral part of your rental business.

If you cannot meet these qualifications, there is a loophole.

If your spouse can qualify as a real estate professional, you can share in the tax advantages if you file a joint return.


Getting Your Real Estate License
Once you've decided to get your real estate license, research your state's licensing requirements.

Taking dozens of hours of classes and passing a real estate exam are standard requirements.

Some states require background checks or 120 or more hours of classroom time.

You should also expect to pay a fee to take the real estate qualification examination and pay several hundred dollars to get your license each year.


To decide if you should get your real estate license, take a look at your past income tax returns.

Then calculate exactly how much money you could have saved if you were a real estate professional.

But before you sign up for some real estate classes, carefully consider what your time is worth.

If you intend to buy a new rental property each year and would like to work at least part-time as a real estate professional, getting licensed may be a good idea.

However, if you're like many part-time landlords, the time investment may not be worth the financial savings.

Posted on Sep 21, 2015

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