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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29579
Experience:  Taxes, Immigration, Labor Relations
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My client is a "Real Estate Professional" as

Customer Question

My client is a "Real Estate Professional" as defined by his employer and paid by W-2. He invests other peoples $ in real estate, buys properties, sells, and rents as an employee for a company where he is paid via W-2. He also bought a rental property for
himself, 100% owner, and property has losses. Can he use the hours that he is paid W-2 as RE Professional to qualify as RE Professional per IRS rules?
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.
Under IRC § 469(c)(7) & Reg. 1.469-9, if the taxpayer spends the majority of his time in real property businesses, meeting the 1/2 personal services and 750-hour tests, rental real estate losses are no longer per se passive. If the taxpayer materially participates in the rental real estate activity, losses are fully deductible.
In this case passive loss limitation woudl not apply.
Losses are fully deductible against other income.
Let me know if you need any clarification.
Expert:  Lev replied 1 year ago.
FIRST TEST: Are more than half of personal services in all businesses (T/B) for the year performed in real property T/B and rental real estate?
--Real property T/B = real property development, construction, acquisition, conversion, rental operation, management, leasing or brokerage. Time spent as an employee in real property activities counts only if the taxpayer is more than a 5 percent owner.
SECOND TEST: Does taxpayer spend more than 750 hours in real property businesses and rentals in which he materially participates?
_____ If answer is NO to either of above two tests, IRC § 469(c)(7) does not apply, and losses are generally limited to $25,000.
_____ If answer is YES to both tests, apply material participation tests to each rental real estate activity to determine whether each activity is passive or non-passive. While not seen often, the taxpayer may have made a one-time election to group all rentals as a single activity.
Let me know if you need any help with verification.
Expert:  Lev replied 1 year ago.
1.Per IRC 469(c)(7), if the following rental real estate activities have been determined to be non-passive and current (but not carryover) losses are fully deductible - Current losses are entered on Schedule E, but not on FORM 8582.
2.if the taxpayer is a real estate professional, but did not materially participate in the following real estate activity - he does, however, actively participate, making management decisions. Losses are entered on FORM 8582 line 1a.
3.if the taxpayer does not actively participate in the rental real estate activity -losses are entered on FORM 8582, line 3b.