Real Estate Professional

[Camp1040]

Trying to split a hair. My client is a full time real estate broker and a RE salesperson, in addition to owning several long term and short term rentals with his spouse who helps him with the rental operations. They jointly own the rentals and recently sold one for a considerable profit. If I am able to classify him as  real estate professional then TP would not be subject to the Net Investment Tax.

My thinking at this point is that he is in the business of brokerage and RE sales and not in the rental business. His income from RE brokerage is approx 75 times the amount received from  rentals. I'm just not being able to justify that the rental incoem and subsicuite sale are his ordinary course of a trade or business.

Thank you in advance for some direction on this issue.

He does qualify as a rea lestate professional but on his Sch.C business and not on his Sch. E income.

[Skylane]

I agree. On Sch E, If you have not been checking Trade or Business not subject to NIT in previous years, I don't think I'd start now. 

[Norman2001]

Qualifying as a real estate professional is an annual election. I don't think it matters whether or not he qualified as a REP in the past. 

Time spent on all real property trades or businesses are taken into account when counting hours to meet the 750 hour threshold.  

I recommend reading CC 201427016 if you haven't already done so.  It has some helpful information. 

[Camp1040]

I would really like to go the way of the memorandum you suggested, but I am stuck on the belief that his real estate brokerage and sales are a different activity than his rental real estate activities. Looks like more research is in order. Thank you for the info, it will help in my reasearch along with the "brains" on this forum.

[Camp1040]

@Norman2001  I may have omitted that TP does not meet the  materially participate qualifications for his rental activities but he does for his RE brokerage agency and sales. I'm trying to find some umbrella hair to split.

[Camp1040]

I won't play with the format bar again.  Give me back the edit function!!

[Norman2001]

Qualifying as a REP gives him the opportunity to qualify for the NIIT exclusion. But since he doesn't materially participate in the rental activities, I don't think that he can exclude NIIT.  But, I could be wrong.

[taxes96786]

Broker, agent and property manager are inclusive to the RE industry. You can be one or you can be all.

[TaxGuyBill]

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@Camp1040 wrote:

If I am able to classify him as  real estate professional then TP would not be subject to the Net Investment Tax.

I'm just not being able to justify that the rental incoem and subsicuite sale are his ordinary course of a trade or business.

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He *IS* a Real Estate Professional for Passive Loss purposes.  Being a broker counts towards that.

https://www.irs.gov/publications/p925#en_US_2022_publink1000104592

With that being said, I'm entirely sure if that 'grouping' would make the rental a 'trade or business' for purposes of NIIT.

[Camp1040]

Thanks @TaxGuyBill  I going to give pub 925 a deep dive, I want the TP to qualify but I want to be sure I'm not just reading what I want to read to make it happen. I can't get past the fact that his real estate brokerage firm and his rental property are seperate, but his firm did handle the closing of the rental property he sold.....More to follow, I will get back to the forum, I'm not ready to run with scissors yet.

[Norman2001]

Read section 1.1411-4 (7) too. Your client doesn't qualify for the safe harbor, but he may still qualify otherwise. Also a good discussion in 

https://www.thetaxadviser.com/issues/2014/oct/tax-clinic-06.html

[TaxGuyBill · Accepted solution]

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@Camp1040 wrote:

Thanks @TaxGuyBill  I going to give pub 925 a deep dive,

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Just read the first few paragraphs in the link I provided.  It seems pretty clear to me that he is a Real Estate Professional.

But as I said, I don't know if that necessarily means it is the same for NIIT.

[Skylane]

My wife’s sagely advice…. Splitting hairs leads to split ends. 🙂

[Camp1040]

As originally stated TP is a REP,and his real estate brokerage and sales activities would allow him to treat losses from his rental activites as deductible, but, my reseach has shown that it (REP) does not allow TP to be excluded the CG from the NIIT.

Thanks to all for the great resources.