Today's question comes from Kelliane, and she says, hi Marco. I just recently discovered your podcast and have been binge-listening. Thanks for the great content. I am an attorney turned entrepreneur who recently sold my eCommerce business. My husband is in medical device sales with a high W2 income. I am now launching a new consulting business and podcast. My husband and I are trying to also ramp up our real estate investing business. After exploring many options. We are most interested in passive real estate investing example, acquiring turnkey, single and multifamily, multifamily, syndications, and hard money lending. We are working diligently to do everything we can to create a passive income, minimize taxes, and achieve financial freedom within the next five to seven years.

Great goal and congratulations on all that.

Because of my husband's high W2 income, I would love to be able to qualify as a real estate professional to take advantage of the tax benefits. However, I don't see how this is possible. If we were to pursue the passive real estate investing strategies as mentioned above, do you have any insight as to how we can get the best of both worlds? Thanks, Kelliane.





Well, Kelliane, thanks for submitting your question. And this is a great question because we are all interested in building a business and, or increasing our income, lowering our taxes, or keeping them under control and of course, achieving financial freedom within the timeframe that we set out to do it. And so this is all great. Now let me begin by first of all, giving you a disclaimer, and I'm going to probably mention again later, I am not a tax advisor or a tax professional, and I don't give out financial advice. So I'm going to give you some perspective and commentary that will at least help put this together for you in your mind and get you on the right track. But ultimately I think you're going to have to consult with a good tax professional that is knowledgeable on the real estate professional classification. But let's talk about that first because maybe you won't even get that far and there are pros and cons and you'll understand why I say that.

So let me, first of all, begin by saying that we all know real estate has an amazing ability to potentially provide tax losses and deductions with tax-free cashflow real estate is one of those investment vehicles where you can actually show a loss on paper, what we call a paper loss, but still have positive cash flow that flows into your pocket. But these deductions, sometimes they're not completely used. And the question that you're asking is how can we take maximum use of these deductions, these passive losses and apply them to all of your income, not just passive income, but active income.

I believe that's the direction you're going with this because your husband has a high income. And so you have high household income. Let's also start off by saying this for those people who are not clear on what a real estate professional classification or status is as a real estate professional, you are able to deduct 100% of your rental depreciation and your quote-unquote losses against any other type of income, whether it be ordinary income or passive income. And you do this all on the front page of your 1040 IRS tax form. So it's a beautiful thing. If you qualify for it, when you can take all of your passive losses, even those losses that are just paper losses on paper, they're not necessarily realized the losses that you actually take as a loss, and you can flow that onto your tax return and take that as a deduction against your income, all income, including ordinary income. That is the goal. The main benefit of being a real estate professional and qualifying for the real estate professional classification.

Now the IRS classifies real estate investors into three classifications. And the first classification is what is known as a passive investor. Now,