Ep. 12 | Real Estate Professional Status (REPS) and Material Participation
Download MP3Welcome to the Teaching Tax Flow podcast, where the goal is to empower and educate you to legally and ethically minimize taxes paid over your lifetime.
Speaker 2:Welcome, everybody, back to the podcast or should I say the teaching tax flow podcast. We're already up to episode 12, so it's a good number. Some people it might be their lucky number. I don't know. It might be three.
Speaker 2:It might be 12. So, Chris, actually, we got a good guest today. And before we introduce her Mhmm. I know a giant problem that we've heard, I shouldn't say a problem, a challenge, right, is the importance of time tracking and mark material participation. Not only is it hard for people to actually do it.
Speaker 2:I can't even say it, apparently, sometimes. So, Chris, why don't we go ahead and actually I'll let you do the grand introduction. Go ahead and, you know, expose our guest.
Speaker 3:Alright. Well, thanks again for listening to Teaching Tech Flow podcast. We all you know, we always ask you for an open mind and a little bit of time. As a practicing CPA, one of the things that we get hit with on a weekly basis are in our private practice and then also within our Teaching Tax Flow ecosystem. Are people wondering how could they keep track of their time to prove material participation or prove that they have real estate professional status within the IRS laws?
Speaker 3:We're gonna talk about that in a little bit. What's a best practice for it? I'm really excited about this episode because real estate and we always talk about one of the three laws of teaching tax flow is that tax agencies are your involuntary business partners, and tax laws are written to encourage and discourage financial and social behavior. Real estate investing is one of those industries that is a very tax advantaged. Real estate investing hits on many of our, teaching tax flow diagnosis.
Speaker 3:Definitely hits on our red diagnosis for people that need an immediate tax deduction. Our purple diagnosis, tax deferral. And my favorite, John, gold diagnosis, tax free income and growth. And to take advantage of some of these tax strategies that we teach, so we've got the diagnosis and those strategies like bonus depreciation, cost segregation study, building a rental portfolio, making the rental enterprise qualified business income deduction. To be able to have those tools or to be able to have those strategies, you need a tool, and that tool is keeping track of your time as a real estate investor or business owner.
Speaker 3:So think about you know, we're a big baseball family here, and you if you're gonna go up to bat or to the plate, you need a bat. And I look at keeping track of your time as that bat. So when we get the question, how do you keep track of your time, that posed a problem as a CPA for me for many for for many years until I met our special guest. Kirsten Lemmer is with us from Rep's Tracker. I'm really excited to have her.
Speaker 3:We're gonna try to be quiet and let her speak so that our teaching tactful listeners learn a lot more excited about. I know. I know. I think full well up with us for the first eleven episodes. But she is extremely intelligent.
Speaker 3:She's a she's a physician. She forgot her medical degree and PhD in molecular biology from University of California in San Diego, and then went to Harvard Medical School. I can't believe she's actually gonna talk to us.
Speaker 2:Well, this is great. We're interviewing smarter people. Right. Isn't that is that one of the laws of life?
Speaker 3:Exactly. I always wanna be the dumbest in the room, which is usually easy for me. But that didn't that didn't that wasn't enough. Right? We always want overachiever.
Speaker 3:She's an avid real estate investor. Both she uses short term rentals, long term rentals, or STR, LTR in our in our verbiage, and founder of Creator founder and creator of Repstracker. Kirsten, can you tell us a little bit about Repstracker? And thank you so much for coming on.
Speaker 4:Thank you for having me. Yes. Absolutely. So Repstracker, I created, just as you said, I am a real estate investor myself. And, back in 2020, I was kind of looking ahead, at the year to come, 2021.
Speaker 4:And, as as we all know in 2020, there was a lot of of shifts that happened in in life. So for my shift, my clinical time, in the hospital went down significantly. And so at the same time, I started ramping up my real estate empire. And so I knew that in 2021, I was gonna be in a really good position to claim reps. And I also my my husband is also a physician.
Speaker 4:So that, you know, kind of, positioned us well for reps. And in 2020, I started looking and and looking to see how I could, log those hours because, especially having a physician background, we're very, risk averse, I guess, you should say, and love to document everything. So, you know, one of the sayings in the hospital is, like, if you if you didn't chart it, it didn't happen. So just
Speaker 3:Tell me about her up.
Speaker 2:Yeah. So there's a lot of similarities right there.
Speaker 4:There really is. There really is. Yeah. So so, you know, I I was really before I even wanted to embark on reps I wanted to have a good system in place to log my hours and I looked and I I thought there's got to be an app for that And, I looked high and low. I could not find anything that was made for real estate investors.
Speaker 4:There was plenty of apps that you could kind of tailor if you wanted to, and it it was an imperfect system. So, you know, I I'm a little bit of an entrepreneur or I guess maybe I should say a lot of an entrepreneur. And, when I discovered that there was such a huge gap in the market, that's that's when I like to say, oh, maybe I can be the one to fill that gap. So, I started to look then. I started looking for people to create the app for me, and I realized it was gonna take a really long time.
Speaker 4:It was gonna take a lot of money, and I just decided to to teach myself to create an app. So I I ended up, creating the app myself. I I ended up bringing on, technical people later on after the launch. But, for the initial beta launch, it was all me. And it was just a lot of trial and error, a lot of talking to real estate investors, figuring out what they needed, what kind of categories they were often, using to to log their hours.
Speaker 4:And I continue to to troubleshoot in that sense and and refine the app based on the feedback of my users. And now, you know, now I have, quite a lot of users. But, but every time that a user emails me, I really I put it into a log, on a, you know, a long term to do list or a short term to do list, and, I really try to mold the app based upon what my users need.
Speaker 2:Would it be a safe assumption to say that v one of this app was a spreadsheet?
Speaker 4:Oh, yeah. Yeah. Absolutely. In fact, I just, archived my spreadsheet yesterday. That's funny that you say that.
Speaker 2:Random guess, but I just assumed that.
Speaker 4:So Yes. Absolutely.
Speaker 3:Well, I love the app. I use it personally. I started using it in 2022 here, and now we're in the '23 as well. It's funny because they mentioned that your husband's a physician. One of these days, after I after we get teaching tax logo, grown out, I guess, but I was thinking I'm gonna create a date new dating app.
Speaker 3:And the dating app's gonna be for people looking for a mate. And and if you're a rep status, you you are very attractive to that high income w two earner because we know and at least if you are part of the teaching tax flow system, so there's some great planning for rep status people to go marry, high w two earners for several reasons, of course. I'm afraid
Speaker 2:to ask what you would title that app. Bro. Actually, I I
Speaker 3:don't know. Maybe it's, you know, well, we we one of our strategies is is hunting pigs, which would be a terrible name where we call passive income generators. So probably not hunting pigs, but but it is a great marriage and that you bring up an amazing point, when you you know, just talking through that is if you are if you do have a spouse that is a real estate professional status and you file jointly, then by default, you are real estate professional status, and there are a lot of tax advantages, for that. So it's, it's quite a you know, there's also the app also features, keep keeping track from what's called material participation. I love the categories.
Speaker 3:You could sort things by, by by category, by property. It exports into Excel. So, John, for you for all the old school people, if they wanna end back up Excel anyway, it's it's there.
Speaker 2:And, actually, before we get too far ahead, for those that don't know what it means, what's your definition of material participation?
Speaker 3:Oh, boy. That's gonna be on the spot. I know. You love that. I so material participation are several tests for material participation, that the IRS came out with.
Speaker 3:And to to be able to deduct any type of losses from rental activities, you either have to be rep status with material participation or you have to hit fit what's the short term rental loophole and have material participation. So this is a this is and I'm glad you asked that because there we definitely have a mini lesson on teaching tax law for this. But there are several tests for material participation. The most common test you're gonna find when you're talking about short term rental properties is what's called the hundred hour rule. So you're putting at least a hundred hours into that activity, and you don't and no one else has more time into it than you do.
Speaker 3:So what's this that's the short term rental property, lowest hanging fruit material participation test, but there are several tests.
Speaker 2:And then, Kirsten, too, a question for you on the on the app, kind of the structure, the layout, the features of it. So I know a challenge and I'm I'm trying to get out of my spreadsheet mind. I think, you know, as we call them sheets literally in there. What if there is a husband and wife, partners in any sense, and they do wanna track, all their time spent, say, between multiple properties, multiple individuals. How are you guys set up for that?
Speaker 4:Yeah. So that's a great question. So on the, short term rental side so, actually, on both sides, what we have so I I should back up. In Rep's Tracker, we have two sides of the app. The first one is the short term rental side, which is the material participation in in short term rentals, and the the other side, which I had already talked about was the rep's side.
Speaker 4:So we had started, this feature on the short term rental side in which we, somebody can log their own hours and then also have a spouse, that that can log in using the same user credentials, but but end up you, logging their hours. And that's more for their organization. And so that when when you export it, you can see who logged which hours. And in the short term rental side, those hours are cumulative. And so they they add to the total material participation hours on the short term rental side, but you can you can filter them out so that you can see both both sides.
Speaker 4:On the long term rental side, Chris, you may wanna go I this may be going into the weeds a little bit. Sure. Not quite cumulative, but we, we've we've also added a spouse in there who can participate in the material participation portion of reps. So, but but then there's we have we have some a somewhat complicated algorithm that still maintains that the primary user gets seven hundred and fifty hours. So so the way that our our algorithm is set up is, not to mislead people in thinking that they have too many reps hours if their spouse, let's say, is is log is the one logging all of the hours.
Speaker 4:So that's that that may be a little bit too much detail for you. But suffice to say that, both sides, the spouse can log their hours as well.
Speaker 3:And I have to say that the app is very user friendly. You can toggle between LTR and STR very easily. The other thing is the keeping track of the hours, like I said, that that just gives you a tool in your toolbox to potentially make tax elections that we're gonna talk about in future episodes just to just kinda sprinkle some stuff, such as that, a rental grouping election or that rental real estate enterprise election if you happen to have profit and you're looking to make, have a qualified business income deduction. I have a question. What feature that what feature have you developed that you had no idea was going to be really wanted when you launched?
Speaker 4:Oh, yeah. So, actually, the the entire side of the short term rental, side, so the the ability to be able to toggle over there was all requested by users. That was a request that I got over and over again. And for a while, now I can't remember. It was it was several months.
Speaker 4:Maybe it was even an entire year. I was, directing users to use the rep side and just kind of, you know, tailor it to their own needs as a short term rental material participation person. So, but but then, you know, it it that did go against my mantra. My mantra being, like, let's let's not have people try to fit a a square peg into a round hole or vice versa. Let's let's let's really try to make this as efficient as efficient as possible for everybody and really suit that particular need that they have.
Speaker 4:And so finally, you know, I got so many requests that I thought, okay. Well, there there really is a need for this. And so I I created an entirely new side so that the toggle over to the short term rental material participation.
Speaker 3:Well, that is an amazing feature. I I enjoy it. The other thing that I I think it's important for listeners to understand is that within the software, there's a there's a actual clock. So you can instead of it'll log you for you. It'll log the time for you if you set the clock and and stop the clock.
Speaker 3:And, and, again, it's really I I just this is this is a you've really helped solve a challenge out there. But in what do they say? That pretty much necessity breeds all good inventions. And,
Speaker 2:But what's next for the app? Yeah. What what's next on the list? I clearly, I love just putting people on the spot. I know.
Speaker 2:Oh my god. Random questions I can ask. I I I'd funnel them in. But where do you where do you guys see things going? I mean, you have obviously you've tackled the short term and the long term side.
Speaker 2:Yeah. Really? And and this, I guess, would be kind of a question for both of you. I mean, maybe what's on on y'all's list from the development standpoint, but then even from the tax planning side? I mean, is there anything?
Speaker 4:Yeah. Yeah. No. That that's a really good question. And so, you know, in in terms of the app itself, I mean, lots of lots of little features and stuff that users have requested.
Speaker 4:I do think one thing that, is is an area that we need to tackle is, often users will ask for guidance, in the, accounting side. So more it's, you know, probably not a day goes by where a user does not email me, to ask me, questions that they they probably should be asking their own CPA, actually. And so building an education piece into the app has been on my radar, or building not not even necessarily intrinsic into the app, but, but perhaps, you know, leading to to a course like you guys have or something like that. A a kind of a straight shot for users to be able to get those those questions answered by a CPA. So because I I am not a CPA.
Speaker 4:I I created the app with the guidance of CPAs, but I am not a CPA myself. So I I always tell people, you know, I I I don't wanna answer their their specific accounting questions. But I would love to be able to very easily, direct them to somebody who can.
Speaker 3:Well, that is a great segue because I think the collaboration between Rep's Tracker and the tax professional, community is very important. That's why we jumped on the opportunity to be a part of the Repstracker ecosystem. And I would encourage other CPAs and the ones that, and and tax professionals, the ones that I'm coaching, I'm going to very highly recommend that they become a part of this ecosystem. It is you know, I think that that's that's really the ability to export though like I said, export those reports is huge for for tax preparation and for for us as tax professionals. And, obviously, you know, we're we're very real estate focused in our private practice, but just, you know, the the material participation is a test you have to pass to take any type of business loss.
Speaker 3:It doesn't have to be real estate. So it's it's been great. And that's gonna segue into the last thing I wanna mention is that, we have a very special offer for the listeners of Teaching Tax Flow, that we're gonna post in the the show notes, and and get out to everyone. The cool thing about this offer, it was originally it was originally put together for only the clients in our private CPA practice, but with a little coast coast coaxing, Kirsten was was nice enough to allow everyone within the teaching tax flow ecosystem the ability to start using the software and the app with a with a special discount, and we're gonna get that out to everyone.
Speaker 2:We'll put the excuse me. We'll put the we'll put the URL in the show notes, Chris, as you mentioned. But what is the code actually for that? Was it I f g?
Speaker 3:Yes. It's I f g, which is our private practice again. But k.
Speaker 2:But the link we'll actually have in the show. So you can click click in the notes to follow that. Use that use that special code in there. Sign up for reps tracker. Before we skip off of it, though, Chris, I as much as I harass you about the acronyms after your name, you are missing one.
Speaker 2:You do know that. Right? What? And and she has it, and you don't. The PhD.
Speaker 2:Why why don't you
Speaker 3:do have everything else? I know. What? Are
Speaker 2:you slacker?
Speaker 3:I am slacker. Well, I will say oh, one more thing. We do and we will
Speaker 2:have I converted.
Speaker 3:We will have an instructional video available in the show notes to to sign up as a walk through into the software. Yes. PhD, I I believe it or not well, it was about a year ago. I knew there was a story. No.
Speaker 3:I went my wife and I went out to, a a wine bar in gorgeous Franklin, Tennessee. And after that visit, I decided to come home and put an inquiry into a PhD program thinking, gosh. I love education, but I you know, what level can I get to? And then I realized, no. It's time to give right now.
Speaker 3:Maybe one day, I'll go back. But it's time to help educate everyone about tax planning and strategy. And I really look up to people that take things to the highest level possible. So very impressive.
Speaker 2:Excellent. Excellent. Well well, Kirsten, is there anything else, Kirsten, is there anything else you wanna add to add to the show? I mean, is there anything again that may be on the horizon here for for Repstracker? I know one big thing is that I can't stress enough is how easy it is to use.
Speaker 2:I mean, the the user interface is extremely simple, extremely straight to the point, which, obviously, it's time tracking is never a a joy, I think, of a lot of people. Mhmm. So the easier you can make it, the better. So anything else you'd wanna wanna let everybody know here?
Speaker 4:You know, I think you guys covered a lot of it, but, if if you are interested in trying a new way to log your hours, you can sign up for a free trial in reps tracker, and it's, no you know, no risk. Cancel anytime during the the trial period. And, yeah, just come come join us, see if you you like it.
Speaker 3:Absolutely. Awesome. Well, thank you so much, and we really appreciate it. I'm so excited that you're on our show.
Speaker 4:Thank you. I yeah. It was great. Thank you so much.
Speaker 2:You look forward to it. Alright, everybody. Well, thank you again for joining in. Again, we will drop the the affiliate link in the show notes that you can click through on that. We'll also make a post, when we do post the show on social media so you can click on that as well with that offer code in there.
Speaker 2:Any questions at all, obviously, reach out to the RepStracker team or ourselves. We'd be happy to guide you in the right place. Yeah.
Speaker 3:Happy tax planning. Happy investing. Excellent.
Speaker 2:Thank you, everybody, and we will see you next week.
