Did my video on the secret tax advantage of pilots get you asking questions? Did it sound too good to be legal?
Here is this secret explained by my tax professional, John Hartung, CPA who in this rare interview, answers all of YOUR questions.
The answers are so exciting, and is the reason why every pilot needs to be investing in Real Estate!
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Add John to your team by email him at: john@kingdomtaxgroup.com
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Pilots make excellent money and we love what we do. We are used to being in command and control in the flight deck. But it’s our financial future, managing cash flow, wealth and passive income that can often seem OUT of our control. It can be a risky gamble to put your money into retirement funds and the stock market. No one gets held accountable if there are significant losses. And so it feels like you run out of options.
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Can’t listen right now? Here’s the Transcript:
Michael Marino:
All right. I’ve gotten a lot, and I mean a lot of feedback and questions after I sent out my video on how airline pilots can easily become a real estate professional in the eyes of the IRS showing you how to qualify for that and also the huge advantages of it. Now, I got a ton of questions, one, because it’s unconventional. Most of us haven’t heard of this before, but the number one question I’ve been getting is there’s a lot of confusion of what counts as real estate activity, and that’s why today I brought my own tax professional CPA John Hartung from the Kingdom Tax Group, who practices outside of Denver, Colorado. He’s going to further talk and clarify all of our questions that we’ve had. John, thanks for joining us today. Can you tell us a little bit about yourself?
John Hartung, CPA:
Yeah. I went to school out here in Colorado. I was born and raised in Jersey, but I went to school here in Colorado. I’ve got an accounting degree from Metro State and a master’s degree in taxation from Denver University. I’ve been self-employed with my own firm since 2006. I’ve just recently the last year and a half changed my name and rebranded into Kingdom Tax Group. I’ve been doing this for quite a while. I’ve specialized in real estate for most of my career, well over 15 years, and I have been in public accounting for 23 years.
Michael Marino:
Many of our followers are airline pilots making well over $200,000 a year and probably paying over $50,000 annually to the federal government in the form of taxes. If a pilot invest in real estate on the side, what type of tax advantages would they have if they qualify as a real estate professional?
John Hartung, CPA:
Normally, if you’re not a real estate professional, you’re subject to the passive activity loss rules with regard to rental properties. What that means is the most you would be able to deduct in rental losses is $25,000, and you would simply have to be an active participant in your real estate activities. That $25,000 deduction phases out between 100,000 and $150,000 of adjusted gross income, and as you said, most of your pilots might make over 200,000. The only way to take advantage of the $25,000 deduction or more is to be a real estate professional. By being a real estate professional, you’re no longer subject to the passive activity loss rules limiting your losses to $25,000. There is no phase out. You would be able to deduct whatever it is that you have as losses on rental properties.
Michael Marino:
Wow. For real estate professionals, that opens up a huge amount of deductions that we can put towards or W-2 tax liability, correct?
John Hartung, CPA:
Correct. It would be ordinary deductions, and it would offset all your ordinary income like wages, for example. It would offset those sources of income to reduce your taxes.
Michael Marino:
Wow. That’s huge. That really opens up the doors for us. Can you walk us through the process of how airline pilots could be classified as real estate professionals in the eyes of the IRS?
John Hartung, CPA:
Well, to be a real estate professional, you have to meet two criteria. Number one is more than half of your time, your activities in a job or a business venture, have to be devoted to real estate activity, and two, you have to have at least 750 hours a year of real estate-related activity. It doesn’t have to necessarily be rental activity in order to state that. You could be a property manager, you could be any number of things regarding real estate, but you have to do it for at least 750 hours in a year. Those are the two criteria you need to meet.
Michael Marino:
Now, we talked about earlier, both on the video and John and I in person, airline pilots can legally only fly a thousand hours or less per year. Does that mean if we accumulate 1,001 hours of real estate activity, now we qualify as a real estate professional?
John Hartung, CPA:
You can. As long as [inaudible 00:03:33] 50% of your total activity, and 1,001 is obviously greater than 750, so yes.
Michael Marino:
That’s the huge advantage we have because we get paid on block time. Our hours are limited per year to a thousand, so all we have to do is go just one hour above a thousand, and boom, we qualify. That’s where airline pilots have this specific advantage because it’s much easier for us to accumulate more than 50% of real estate activity versus somebody with a normal 9:00 to 5:00 where they’re working 40 hours a week.
John Hartung, CPA:
Correct.
Michael Marino:
Their threshold is much higher, so it’s huge. John, a lot of my followers have come back, and there’s been a lot of confusion. They’ve been looking at IRC section 469, which specifies that real estate activity must materially participate in order to count. Can you further explain this requirement? It’s all over the internet, and it’s confusing a lot of people.
John Hartung, CPA:
Yeah. I don’t blame you. There’s seven total criteria for what constitutes material participation. The first one is 500 hours or more per year of doing that activity. That’s material participation. Another one is a hundred hours in a given year where no one else does any more than you do. A third one could be you may not meet a hundred hours of activity, but no one else is doing more than you do.
John Hartung, CPA:
The first two are usually the ones you want to go by. Those are going to be your guiding star, and it’s per activity. We might talk about this a little later, but each rental property that you might own is one activity, but there’s a way around that. Now, we can cover that in a little bit, but that’s basically what the material participation rules are. Now, if you’re looking to be a real estate professional, you’ve got to meet the 750 hours in a year anyway, it’s material participation by definition, so you’re fine in that case.
Michael Marino:
A lot of my followers are new to real estate investing, and so right now, they spend majority of their time on education of whether it be in-person seminars, online webinars this year, obviously, if they on YouTube real estate education videos, or if they’re just online on Zillow looking at properties or if they’re on the phone with their real estate agent. All that time searching for properties, but more specifically, all that education time, how does that fit into the material participation limit?
John Hartung, CPA:
Well, it may qualify in certain respects. It would certainly qualify as deductions against your income in real estate, but unfortunately though, it doesn’t really qualify towards the hours that you need in order to meet these other criteria. Some hours that to qualify though are management activities, so if you’re doing activities that if you were to hire a property manager, it would be those things that they’re doing. Those hours would qualify. There’s always not paying somebody else to do it. That’s basically the rule you want to watch out for, so here, if you’re spending a great deal of time in education, it’s not going to really help you much with regards to the hours you’re trying to accumulate.
Michael Marino:
For most of your clients, they accumulate that time after they purchase the property, it sounds like.
John Hartung, CPA:
Yes.
Michael Marino:
Okay. That’s huge. That’s key.
John Hartung, CPA:
Yes, it is.
Michael Marino:
[crosstalk 00:06:40]. As your client, I’d assume you’d be the one to determine if I’m a professional this current year. What type of documentation and record keeping do you advise your clients such as myself to provide you with in order for you to identify if we meet those qualifications or not?
John Hartung, CPA:
Normally, we can pretty much take your word for it, but what I recommend that you do that you could give to your tax professional is to keep a log of the activities that you’re doing. If you’re driving to the property to go do a repair, that time from driving to the property, doing the repair, all of that, I mean, going back to the hardware store to get more stuff if you’re handling the repairs yourself, all of that time is time that you’d want to count. You’d want to keep a log of this. If you have several rental properties, I keep a separate log for each one. I’d keep your receipts and keep your driving logs. Those are the kinds of things that you’re going to want to show if any questions ever come up.
John Hartung, CPA:
For example, in the one criteria I told you about for material participation where if you do a hundred hours and nobody does any more than you, if you’ve got a son or a daughter or your spouse, if they go to do something at the house, let’s say you send one of them over there and clean the house, you want to document that time because the more documentation you have, the more credibility it lends should anybody question. If you were to take this log book to the IRS and say, “This is my log book for property four,” it shows your time, it shows your children’s time, your spouse’s time, and they can actually look and go, “Okay, they’ve obviously kept track of time,” those kinds of records will always give you the benefit of the doubt in any kind of examination from the IRS.
John Hartung, CPA:
You’d want to make sure you keep those logs, keep your receipts that connect to those logs. If you say you went there to do repairs, keep your receipts to show what you bought in order to do the repairs you’re saying you’re doing. Any kind of cross referencing system like that would work really well.
Michael Marino:
It sounds like there’s a lot involved when it comes to the real estate professionals status. A lot.
John Hartung, CPA:
Yeah, there is. There is.
Michael Marino:
It sounds like everybody’s in a different situation, whether they have 12 multifamily properties or two single-family, no matter what your size is, you need to have a tax professional on your team. I’ve been getting a lot of questions. A lot of people are worried. “Well, I don’t know if I have enough time.” Correct me if I’m wrong, John, it sounds at the end of the year, we provide you all the documentation of our records, and you’re the one who could tell us, “Yep. You qualify this year. No, you don’t qualify this year.” It sounds like it’s not like if we decide we want to be and we don’t make it this year, we’re not going to jail or anything. It’s just-
John Hartung, CPA:
No. Of course not.
Michael Marino:
Yeah. Yeah. So-
John Hartung, CPA:
[crosstalk 00:09:12].
Michael Marino:
… at the end of the year, we’ll just provide you the documents, and you can determine it for us.
John Hartung, CPA:
Exactly. Exactly. You may qualify one year, but not the next year. It can vary one year from another, and there’s no harm, no foul in doing that either, but I do want to reiterate though, you have a total of 750 hours, but you have to materially participate in each activity. As I said, rental properties, each rental is a separate activity, so you’d have to do 500 hours for every rental property. Here’s how you get around that. It’s part of the code. It’s not something tricky. You make an election to group the properties as one activity. If you have 15 rental properties and you group those one activity, 500 hours for all of the properties combined meets the criteria for material participation.
Michael Marino:
Oh, wow.
John Hartung, CPA:
Okay? It makes it far simpler. Still have the 750 criteria for real estate professional, but as far as material or participation, now you’ve got one activity because you elected to treat them that way.
Michael Marino:
This is just the pure election. It doesn’t mean I have to put all my properties in one LLC. Correct?
John Hartung, CPA:
Correct. Correct. You would group them up. You’d make the election to list the properties that you’re grouping together, and that’s all you would have to do. When you speak of LLCs, there’s some other criteria with regard to limited liability companies and how much a given individual owns and what the rules are for that, so that gets into another little bit of realm, but ultimately, at the taxpayer level as opposed to the LLC level, you can still make the election to group stuff together. You don’t have to group them all together in one shot. Either you could group 10 properties in one, you can group five in another, but then you still have two, now, activities that you have to meet the criteria for for material participation. I just want to make sure I’m clear. You don’t have to meet the 750 hour criteria for each activity. That’s just all real estate activities combined.
Michael Marino:
Oh, I see. Yeah. Big difference.
John Hartung, CPA:
Yeah. There’s a huge difference.
Michael Marino:
Excellent. As you could see, having a tax advisor on your team, especially when it comes to high-level stuff like this as a real estate professional status, you have to have somebody like John on your team. I have John on here because we’ve worked together. He’s already familiar with how we get paid, all of our intricate ways that the FAA regulates us. It’s good to have somebody on your team who understands where you’re coming from because we’re a bit of an oddball compared to most 9:00 to 5:00 jobs. John, if any of our followers want to add you to their team, how would they contact you?
John Hartung, CPA:
The best way to contact me is through my email address, john@kingdomtaxgroup.com, and it’s J-O-H-N @kingdomtaxgroup.com. That is the best way to reach me.
Michael Marino:
Okay, fantastic. Guys, like a lot of your questions, you had some doubts in regards to it, a lot of confusion. Hope this clears up a lot of it, but most importantly, getting a tax professional like John on your team is critical. Again, if you want to contact John, his website is kingdomtaxgroup.com, or if you’d like to contact me, it’s layovermoney.com, click on Book With Mike, and I’ll be happy to talk to you.