Real Estate Agents Exempt from Passive Loss Rules

A recent Tax Court Summary Opinion reversed the IRS's position that a real estate agent wasn't a real estate professional under tax law. This made the real estate agent/taxpayer eligible to claim real estate rental losses as non-passive and deductible.

So what's the big difference between non-passive and passive activity losses? Significant to many. Passive activity losses are limited in the amount you can take to offset other non-passive income sources. Non-passive activities are not limited.

In general, any rental activity is a "passive" activity - regardless of the taxpayer's participation. Internal Revenue Code section 469 rules don't apply to a "qualifying real estate professional". Just because you call yourself a real estate professional doesn't mean you are automatically entitled to treat the activity as non-passive. You must also meet the general material participation standard. Specifically, more than one-half your time AND more than 750 hours of services during the tax year must involve real estate that you materially participate. This same rule is applied to landlords, developers and brokers.

The IRS took the approach that a real estate agent was not a licensed real estate broker and could, therefore, not engage in the real property trade or business as defined under section 469. The tax court disagreed holding that a taxpayer doesn't have to hold a real estate license to be treated as engaged in a real estate brokerage trade or business. As long as the material participation standard is met, the court opined, a taxpayer can claim losses incurred on rental real estate as non-passive.

Of course, questions regarding passive activity losses and the participation rules that apply should be reviewed by your tax professional. You certainly want to make sure you meet the qualifications before treating them as non-passive and deducting them against other non-passive sources of income. In addition, I do want to note that a Summary Opinion uses a different standard of evidence, is a less formal proceeding and may not be appealed....meaning...it's specific to this case and you, technically, are not allowed to cite the case or rely on it as precedence. But if you are a real estate agent, and not licensed as a broker, you now at least have one Summary Opinion that supports your case!