Real Estate Agents owning rental property - Can you take the tax loss?

I am sure that come of you Active Rain real estate agents also invest in real estate as rental property.  You may or may not be able to deduct your rental losses... READ ON.

Rental losses are considered "passive" losses, and usually can only be used to offset passive income on the tax return.  Now rental losses can be deducted EVEN IF (added together for all rental properties) they exceed passive income up to $25000.  I put up an earlier post on this topic (more of a general public kind of post) that you may want to check out... Deducting Rental Tax Losses - Can you do it?

Here is the real estate professional exception to that rule (always an exception!!)...

"Real Estate Professionals" can deduct MORE than the $25000 loss on rental losses in a given year.  This is our NAR PAC dues working for us!

Now things get more complicated...

What is a "Real Estate Professional"?

Well, according to the IRS (IRC Sec. 469(c)(7)), the "Real Estate Professional" includes someone who satisfies both of the following:

1. More than 50% of your personal services are performed in the real estate business in which you materially participate AND your material participation in the real property trade or business exceeds 750 hours per year, AND
2. You must show that you materially participate in the rental activity

Before you read the above and say, "That's me! No problem!", read further!!

What is the definition of "real estate business"?

"any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business."

Did you see Real Estate Agent in that definition?

Me neither, and neither does the IRS. 

Before you go crazy and say, " I am in the brokerage trade or business!  The definition of a broker is someone who brings buyers and sellers together, and that is what I do!", I agree with you!

The IRS does not!

Before you say, "I don't agree with you or the IRS, and I am taking the deduction anyway!", know this... it has been denied before.  If you are a real estate agent, according to the IRS, you do not fall into the definition of a "real estate professional", and the deduction could be denied, and you may be in for a fight.

I do believe that it is a fight that you will win.  In the prior cases where the deduction has been denied, the taxpayer did not fight it all the way.  When I say all the way, I mean taking it to the tax court system.  I believe that anyone fighting it would have the full support or NAR and their state association, and that to settle the argument once and for all, would be in our favor for now and the future.  But the problem is... at what cost.  The reason that this battle has not been fought is the cost of the battle has outweighed the benefits for those taxpayers.

While I don't agree with the IRS on this issue, I do want to make you aware of the facts and issues with this deduction, and what may or may not happen.  Good luck!