Real Estate Profession
A taxpayer is a real estate professional (qualifying taxpayer) for a particular tax year if he meets BOTH qualifications below:
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QUALIFICATION #1 - More than half of the personal services (see below) the taxpayer performs during that year are performed in real property trades or businesses (see below) in which the taxpayer materially participates (Code Sec. 469(c)(7)(B)(i)), AND
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QUALIFICATION #2 - The taxpayer performs more than 750 hours of services during that year in real property trades or businesses in which he materially participates. (Code Sec. 469(c)(7)(B)(ii))
A taxpayer who owns at least one interest in rental real estate and who meets the above tests is a real estate professional. (Reg § 1.469-9(b)(6))
Being a Full-Time Real Estate Professional Isn’t Enough – The IRS audited two years of returns of a couple that filed joint returns and disallowed their rental losses, contending the losses were passive losses (taxpayers’ incomes exceeded the cap for the $25,000 loss allowance so no amount of loss was allowed).
The taxpayers’ position was that the wife’s full-time occupation as a real estate professional meant that all rental losses are automatically nonpassive and deductible, regardless of material participation. The key question before the court was whether the taxpayers must establish their material participation in their rental real estate activities separate and apart from the wife’s undisputed material participation in her profession as a real estate agent.
The Court concluded that they must, but had not, because she kept no records documenting the hours spent in her rental activities since she (erroneously) thought that as a real estate professional she didn’t have to prove material participation in the rental activities. (Gragg v Comm., U.S. Court of Appeals, Ninth Circuit; 14-16053, August 4, 2016, affirming DC Calif. decision)