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Real estate professional status

16 Jul 2014

New legislation provides that any net loss from passive activities during a taxable year is disallowed and carried to the next taxable year. Unless the taxpayer qualifies as a real estate professional, passive activity includes any rental activity. Taxand USA explains how companies can qualify for real estate professional status. 

Under Section 469 a taxpayer qualifies as a real estate professional if:

  • More than one-half of the personal services performed in trades or businesses during such taxable year are performed in real property trades or businesses
  • The taxpayer performs more than 750 hours of services during the taxable year in real property trades or businesses in which the taxpayer materially participates

Real property trades or businesses are not limited to rental real estate they also include real property development, construction, acquisition, conversion, rental, operation, management, leasing,or brokerage trade or business

Significantly for activities that a taxpayer undertakes as an employee to count toward the 750-hour threshold in Section 469 the taxpayer must own at least 5% of his or her employer. Even if a taxpayer qualifies as a real estate professional Section 469 suspends the taxpayer’s losses unless he or she also materially participates in the activity that gave rise to the loss. The Code provides some relief because Section 469 allows a taxpayer to elect to treat all rental real estate activities as one activity for purposes of Section 469. 

Discover more: Recent developments regarding real estate professional status

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Tyler Horton
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Taxand's Take

In general the renewed IRS focus on Section 469 should remind taxpayers of the importance of maintaining contemporaneous documentation of the time that they spend in various business activities. Although the passive activity rules in general and material participation in particular are fact-intensive analyses a taxpayer with the right facts and supporting documentation can still prevail.

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