What is a Real Estate Professional? - John R. Dundon II, Enrolled Agent
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What is a Real Estate Professional?

The Perturbing New Treatment of Patents Under the Tax Cut & Jobs Act (TCJA)

What is a Real Estate Professional?

In reviewing James F. Moss, et ux. v. Commissioner 135 TC No. 18 to be a real estate professional, a taxpayer must meet two requirements:

(1) More than one-half of the taxpayer’s personal services must be performed in real property trades or businesses in which he materially participates; and

(2) The taxpayer must perform more than 750 hours of service in real property trades or businesses in which he materially participates.

If both tests are met, the taxpayer is allowed to deduct his loss in full for the rentals in which he materially participates.

The regulations for §469 state the taxpayer can establish his participation in an activity by any reasonable means. Strict time reports and logs are not required if other reasonable means can establish the participation under Reg. §1.469-5T(f)(4).

Rental properties are generally considered passive activities under §469(c)(2) regardless of the number of hours a taxpayer participates in the activity. However, §469(c)(7) provides an exception for real estate professionals while §469(i) allows for a special $25,000 allowance for taxpayers who actively participate in the rental activity.

In this case James Moss worked as a full-time nuclear technician. He also owned four separate rental properties.  Mr. Moss claimed that his actual time spent on the rental properties PLUS his ‘on call’ time to ‘be available’ to work the rental properties put him over the 750 hour/year threshold qualifying him as a real estate professional. The Court sided with the IRS stating that in order to satisfy the 750-hour test, the taxpayer must actually perform services for the rental properties. Since Moss did not actually perform any services while “on call,” he cannot use the “on call” time towards the 750-hour test. As such, he did not have enough hours and was disallowed real estate professional status.