CALIFORNIA’S OWN SET OF RULES If you’re in California, then it gets a little messy. In contrast to federal law, California does not conform to the REP exception. Even if you qualify as a REP on the federal level, California still categorizes your rental activities as passive. This divergence means you cannot offset non-passive income with passive losses at the state level, which is a huge departure from federal tax treatment. What’s interesting about the non-conformity situation is that a typical CA-based taxpayer with substantial real estate activities can have a federal taxable income of $0 and as a result, income tax outcome of $0 while also tons of losses to carry over to future years as a result of cost segregation studies. Simultaneously, for California income tax purposes, they can owe a substantial California taxable income number with a reasonably sized tax bill (up to 13.3% in CA) to pay at tax time.
NAVIGATING REP IS AKIN TO WALKING A TIGHTROPE.
CALIFORNIA DOES NOT CONFORM TO THE FEDERAL REP EXCEPTION.
CLOSING SHOTS:
Navigating REP is akin to walking a tightrope. On one side, there’s the treasure trove of deductions. On the other? Potential pitfalls, especially if the IRS comes knocking. And for Californians, there's an added layer of complexity. Bottom line: Overclaiming your REP status isn't just risky— it can be downright costly. When playing the REP game, always lead with precision and caution. After all, no one wants an unexpected date with the IRS.
STEPHEN MORRIS, CPA, MBT, CCIM Founder AdviseRE (310) 795-4370 Stephen@AdviseRE.tax
Since 2005 Stephen has focused almost his entire CPA career on real estate. He’s also a California licensed real estate broker and real estate developer. Over the last 10 years he has completed numerous projects in the city of Los Angeles, primarily ground-up apartment buildings. Stephen is passionate about helping real estate investors with their tax and operational problems and coaching his clients and colleagues on best practices to increase wealth through real estate investment strategies.
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