K1 - Real Estate Professional Status Question for Claiming Depreciation Against W2 Income

This is a great question about real estate professional status (REPS). For you to qualify as a real estate professional for tax purposes and use that depreciation against your W2 income, you need to meet two specific tests: 1. You must spend more than 750 hours per year in real estate activities in which you materially participate 2. More than half of your total working hours must be in real estate activities The tricky part for you is that hours worked as an employee in real estate don't count toward the 750-hour requirement UNLESS you own at least 5% of the company you work for. Since you mentioned you work for the PE firm but don't own it, your day job hours likely won't count toward qualifying you as a real estate professional. Your investment in the GP is a positive factor, but you'd need to show material participation in the actual property management activities of that specific investment, not just in acquiring the property. The IRS looks at each property activity separately unless you make an election to group your real estate activities.

After struggling with almost the exact same situation last year, I discovered taxr.ai (https://taxr.ai) and it completely changed my understanding of real estate professional status requirements. I was also working in real estate PE and had K1 depreciation I wanted to use against my W2. The platform analyzed my specific situation and showed me that while my employee hours at the PE firm didn't count, I could document my other real estate activities more effectively. Their tax analyzer tool actually found a way for me to group certain activities and meet the material participation requirements in a way my previous accountant missed.

I just wanted to follow up - I decided to try taxr.ai after my previous comment, and I'm honestly surprised how helpful it was. I uploaded my K1 from my real estate investment and answered some questions about my participation activities. The system immediately identified that I wasn't meeting the material participation tests in the way I thought. It showed me that I needed to document at least 100 hours of participation in each property activity and that my participation needed to be greater than any other individual's hours. I'm restructuring how I'm involved with my properties now and keeping much better time logs. The detailed guidance on what specifically qualifies as "material participation" was way clearer than what my regular accountant told me. Definitely worth checking out if you're dealing with real estate professional status questions.

If you're still struggling with this question, you might want to try calling the IRS directly. I know it sounds crazy, but I actually got through using Claimyr (https://claimyr.com) when I had a similar K1 question last year. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c I waited for weeks trying to get through to the IRS normally about my real estate professional status, but using their service I was connected with an agent in about 20 minutes. The agent confirmed exactly what I needed to document to qualify as a real estate professional. They clarified that the 750 hours need to be in activities where you materially participate, not just general real estate work.

I need to eat crow here. After my skeptical comment, I was desperate to figure out my own K1 issues and decided to try Claimyr as a last resort. And... it actually worked exactly as described. Got through to the IRS in about 15 minutes which is nothing short of miraculous. The agent I spoke with clarified that my situation with a real estate partnership investment was different than I thought. She explained that material participation is determined on an activity-by-activity basis unless you make an election to group your real estate activities together, which I hadn't done. She also confirmed that passive losses from real estate can be carried forward indefinitely until you have passive income or dispose of the activity. This clarification is saving me from making a mistake on my return that likely would have triggered an audit. Sometimes you need to hear it directly from the IRS to get the correct interpretation of these complex rules.

Something nobody's mentioned yet - have you considered converting some of your work arrangement to independent contractor status? I was in a similar position (worked for a developer but didn't have 5% ownership) and was able to restructure part of my compensation to a 1099 basis for specific projects. This allowed me to count those hours toward the 750-hour test since I was no longer an employee for that portion of my work. It's not a perfect solution and has other tax implications, but it helped me qualify for real estate professional status. You'd need to make sure there's a legitimate business reason for the restructuring beyond just the tax benefits.

Everyone's giving great advice about qualifying as a real estate professional, but let's not forget about the basis limitation and at-risk rules. Even if you qualify as a real estate professional, you can only take losses to the extent of your basis in the partnership. Since you mentioned it's a new investment with bonus depreciation, make sure you have enough basis to actually claim the losses. Your initial capital contribution plus your share of partnership liabilities minus any distributions determines your basis. If the depreciation exceeds your basis, you'll have to suspend the excess losses until you have enough basis.

Slightly off topic but has anyone used cost segregation with bonus depreciation for apartment buildings recently? My K1 shows huge depreciation but I'm worried about depreciation recapture when we sell the property in 5-7 years. Especially since bonus depreciation is phasing down now (80% for 2023, 60% for 2024, etc). Seems like it just creates a tax time bomb for later.