Don’t Invest in real estate without knowing this one rule

Imagine this: you’ve got a few real estate properties in your portfolio. Maybe you’re renting out a condo or two, or you’ve dipped into short-term rentals. You’re making those properties work for you—bringing in rental income (cash flow!) and gaining equity. Life is good!

As an elite seller, you invested in real estate because you heard it would save you money on taxes so you are pumped to see your tax return this year…but when your CPA sends it to you, suddenly you see you owe MORE than you normally do! What happened??!?!

In order to not let this happen to you, today we’re going to talk about what I feel is the most important tax rule to be aware of when investing in real estate to reduce your W-2 income: material participation. If you’re not aware of the material participation rules, you could be missing out on using those real estate losses to offset your W-2 income, leaving serious tax savings on the table.

So, how do you make sure you’re in the game and not just watching from the sidelines? Let’s talk about material participation, what it means, and the steps you need to take to use those real estate tax paper losses to your advantage.

Why Material Participation Matters

In the simplest terms, the IRS wants to make sure that you're not just an investor sitting back and letting someone else do all the work.  To be able to offset real estate losses against your salary and commissions (or other W-2 income), you need to be more than just a passive investor. You have to materially participate in your real estate activities.

This could save you thousands in taxes every year. If you’ve got real estate paper losses, like depreciation or property repairs, these can directly reduce your taxable income—if you qualify.

The 3 Rules to Material Participation

Now, let’s talk about how you get there. The IRS has a few tests to see if you materially participate. You only need to meet one of them, but here are the most common ones that might apply to your situation:

1. 500 Hours Rule

This one’s straightforward: if you spend 500 or more hours actively working on your real estate activities, you’re golden. This includes managing the property, coordinating repairs, dealing with tenants, and even marketing. If you’re on the ground and in the weeds, you're likely meeting this rule.

Example: Let’s say you’ve got a couple of properties, and between screening tenants, fixing leaky faucets, and handling contracts, you’re putting in an average of 10 hours a week. Over the course of a year, you’ll hit that 500-hour mark.

2. Substantially All Participation Rule

This one means that you’re the one doing most of the work. If you’re the one handling nearly everything related to the property (and not a property manager), you probably qualify, even if you don’t hit 500 hours.

Example: You have a rental property, but instead of hiring a property manager, you’re the one responding to tenant calls and coordinating with contractors. As long as you’re doing most of the work compared to anyone else, you’re good here.

3. 100 Hours + More Than Others Rule

If you don’t hit 500 hours, there’s still hope. If you work at least 100 hours on the property and your hours are more than anyone else’s, you can still meet the material participation requirement.

Example: Let’s say you spend about 120 hours a year on your property, but you have some outside help from a handyman. As long as you’re working more hours than your handyman, you could qualify under this rule.

Why This Is a Game-Changer for Tech Sellers

As an elite tech seller, you're likely making good money. That’s awesome, but it also means your tax bill is probably pretty hefty. If you’re investing in real estate on the side, the ability to offset those real estate losses against your W-2 income can be a big win. Imagine lowering your taxable income by thousands—just by making sure you meet the material participation requirements.

And while we’ve touched on some key principles here, keep in mind that the IRS does have other ways you can qualify that we didn’t touch on today. There are other ways to reach material participation status and another category all together called real estate professional status, which can unlock even more opportunities. But we’ll dive into real estate pro status in a future post.

Conclusion

In short, if you’re not making sure you materially participate in your real estate activities, you could be missing out on thousands of dollars in tax savings. The rules aren’t complicated once you know what to look for, but it does take some planning to make sure you’re hitting the right marks and documenting everything like you should.

If you want to dive deeper or know more, feel free to reach out to me, and we can talk. Until then, keep on crushing it!

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Whenever you’re ready, here are a couple of ways in which I can help you save money on your taxes:

1. Book a free Strategy Call: Provide me with some financial information before the call and in 45 min to an hour I’ll give you every strategy, tactic, tool, and adjustment I’d make to your financial life to help you pay thousands less in taxes and build wealth faster.

2. Book me as a Keynote Speak: In my talks I share the practical strategies, principles, and rules anyone can adopt to save them thousands of dollars a year on taxes and build wealth more quickly.  

3. ​Start working together: Feel like you've read enough and are ready to get some help implementing the things we talk about here in this newsletter? Respond to this email letting me know and we can talk about next steps.