Discussion:Clarify a point in TA's Real Estate Professional article

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Discussion Forum Index --> Basic Tax Questions --> Clarify a point in TA's Real Estate Professional article


Discussion Forum Index --> Tax Questions --> Clarify a point in TA's Real Estate Professional article

Libinius (talk|edits) said:

4 February 2013
On the TaxAlmanac article Real Estate Professional, what is the source for this statement?
"As a general rule taxpayers who only participate in trades or business that only involve real estate transactions are not considered to have materially participated in a real property trade or business. As an example an attorney or accountant who specializes in real estate would not be involved in a real property trade or business."

I am not sure that is right since real estate professionals can include brokers and listing agents, who can work 750+ hours on their broker business and then materially participate on the side in their rental real estate operations.

Trillium (talk|edits) said:

4 February 2013
This question has been moved into the discussion forum from the "articles" section of the site, where it was posted earlier today.

According to the article history, that excerpt was added by a then (and possibly now) Intuit employee, User:Williamh, on 5/27/05. For whatever that info is worth....

Ckenefick (talk|edits) said:

4 February 2013
Statement might be a bit ambiguous, but the point of it is that an attorney or accountant is too far removed from the transactional and operational side of things to qualify. You'd have to look at the definition of "real property trades or businesses" as outlined in c7. The statement is not suggesting, based on my reading, that a broker and listing agent would not qualify. I understand what the article is saying and I would agree with it, but I might have written it a bit differently. We've all had a real estate attorney client who says, "Why don't I qualify as a RE Pro?"

Ckenefick (talk|edits) said:

4 February 2013
From the Code:

Real property trade or business. For purposes of this paragraph , the term “real property trade or business” means any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.

Also, there might even be a ruling or court case on the attorney issue.

Libinius (talk|edits) said:

4 February 2013
My question is that the first statement seems too broad, as it covers everyone who works on only "real estate transactions".

Also, I think that someone who works in-house at a real estate development or brokerage firm would be a real estate professional (assuming 5%-employee requirement is met), even if he just does legal and compliance work there.

Ckenefick (talk|edits) said:

4 February 2013
I agree. First statement is too broad. But I think the writer's intent was to keep it narrow, to indicate that the taxpayer can't be far removed from the transactional or operational aspects of the real property trade or business. Again, a real estate attorney would not qualify. He's in the legal business, an outsider looking in, working as a support agent on deals wherein his clients might be in real property trades or businesses.

Also, I think that someone who works in-house at a real estate development or brokerage firm would be a real estate professional (assuming 5%-employee requirement is met), even if he just does legal and compliance work there.

Don't know. A good discussion question to bat around.

Podolin (talk|edits) said:

4 February 2013
My question is that the first statement seems too broad, as it covers everyone who works on only "real estate transactions". The opening phrase is "As a general rule..." That phrase could have been deleted and, instead, the word "necessarily" could be inserted between "not" and "considered. To me, that sentence is simply saying that their work as attorneys or accountants is not, by itself, considered material participation in a real estate trade or business. In particular, the example of an attorney or accountant who specializes in real estate could use (and should have) language such as "by virtue only of that activity".

Also, I think that someone who works in-house at a real estate development or brokerage firm would be a real estate professional (assuming 5%-employee requirement is met), even if he just does legal and compliance work there. I'd agree. As you said, I am not sure that is right since real estate professionals can include brokers and listing agents, who can work 750+ hours on their broker business and then materially participate on the side in their rental real estate operations.

Chris, I hope you are not saying that, say, an attorney or accountant who meets all the requirements of ownership and hours, but "only" works on structuring, analyzing, advising, reporting, auditing, compliance, and the like, but nothing to do directly with the "transactional and operational side", cannot be a real estate professional. That person may be crucial to the success of the business.

Ckenefick (talk|edits) said:

4 February 2013
Chris, I hope you are not saying that, say, an attorney or accountant who meets all the requirements of ownership and hours, but "only" works on structuring, analyzing, advising, reporting, auditing, compliance, and the like, but nothing to do directly with the "transactional and operational side", cannot be a real estate professional.

What I'm saying is if you have a lawyer at ABC Law Firm and he structures deals on behalf of his clients and performs the closings, he would not be a RE Pro.

Ditto for an independent accountant that keeps the books for 100 RE Developer/management/rental clients.

Libinius (talk|edits) said:

4 February 2013
I don't know if 'real property trade or business' should be so narrowly construed, absent some concrete authority. Reporting, compliance, legal analysis, etc. can be part of a real property 'operation' or 'management' trade or business.

I've seen some cases involving lawyers but they don't seem to be real estate lawyers.

Ckenefick (talk|edits) said:

4 February 2013
I don't know if 'real property trade or business' should be so narrowly construed, absent some concrete authority.

I can tell you this: If a "real estate" attorney includes his lawyering time in the 750-hour/50% tests, he can expect a fight from the IRS. The MSSP is pretty clear on this. I don't think the legislative intent behind this provision was to give lawyers a break on their taxes. And, quite honestly, this is not a fight I would take up with the IRS, which means a lot coming from me.

JAD (talk|edits) said:

4 February 2013
Agree with Chris. Is the atty in the real estate business or the legal business? He is in the legal business.

RexT2013 (talk|edits) said:

4 February 2013
If a "real estate" attorney includes his lawyering time in the 750-hour/50% tests, he can expect a fight from the IRS. The MSSP is pretty clear on this.

Can you point me to a page in the MSSP where it states this?

What about a self-employed architect, whose profession is designing and drawing up plans for buildings, bridges, etc. and generally supervising the construction? Can he qualify as a RE pro?

Ckenefick (talk|edits) said:

4 February 2013
See page 61 of the pdf.

http://www.smallbusinessnotes.com/pdf/passive.pdf

RexT2013 (talk|edits) said:

4 February 2013
Ck, your MSSP is obsolete. The link you provided is to the IRS Passive Activity Losses Reference Guide (Training 3149-115, 2/96). The IRS replaced this in 2005 with the Passive Activity Loss Audit Technique Guide (IRS Training 3149-115, 2/05). http://www.irs.gov/pub/irs-mssp/pal.pdf

The older 2/96 guide contains the statement, “An attorney or an accountant who specializes in real estate, for example, would not be a real property trade or business.” But the Audit Technique Guide does not contain any similar statement.

Ckenefick (talk|edits) said:

5 February 2013
First, the MSSP is not obsolete. The 469 rules haven't changed in years. C7 came out in 1994, the regs a year later. Second, I do realize, having done this for a number of years, that the IRS updates their own internal materials from time to time. Third, be my guest in making the argument that your closing attorney client is a real estate professional. Be sure to put "Real Estate Professional" down for his occupation. And when the IRS asks you what he does for a living, make no mention of legal work. Stick to "real estate professional." And simply point out that the IRS' own internal position is no longer one of "an attorney can't count all the hours he works on his clients' closings"...because the revised MSSP no longer contains this statement. I'm pretty certain that if you tried to pull this maneuver, you'd lose and client would be whacked with a 6662 penalty. Check the history around this provision. It was the real estate community, not the legal community, that was up in arms about it and to whom Congress provided relief. Courts have held that the 469(c)(7) definitions are plain meaning defintions. See Shri Agarwal for example. The only thing here that they'll give you, possibly, is negotiating contracts. And let's not forget that RE Pro status merely makes the activities no longer per se passive. They're still tested under the normal material participation rules.

Anyway, that's just my opinion on the matter. I respect everyone else's opinion on this matter, and I might change mine if I hear something persuasive. But up to this point, I have not. I really do think it is as simple as JAD stated. (And if Harry is listening, please don't try to tell us that the *tenant* is in a real property trade or business because he occupies space and otherwise *manages* the property. I believe the -9 reg might cut you short).

Podolin (talk|edits) said:

5 February 2013
Cutting through what I was saying above, but apparently not clearly, is this. First, an individual can be an independent real estate attorney, working only for real estate clients and not be a real estate professional as a result of that activity. No argument there. But that same individual could also have a separate real estate business that he runs and owns, and, as a result of that business, be a real estate pro. No great revelation there, but I say it because of the OP reference to and then materially participate on the side in their rental real estate operations.

Perhaps more controversially, I was also saying that a very large, active company in real estate might well include in its management a talented real estate attorney who might negotiate acquisitions, construction contracts, leases, sales, zoning issues, financing, and the like, possibly supervising a staff of lawyers (or an outside law firm), such that he is clearly a real estate professional, but is also clearly a real estate attorney, actively using both skills. Drawing a line between the attorney and real estate activities would be difficult. [I am aware of at least three such situations].

RexT2013 (talk|edits) said:

5 February 2013
Ck, I never said that an attorney who simply provides advice on real estate closings is a real estate pro.

I simply wished to point out that the IRS replaced the 2/96 MSSP you cited with an Audit Technique Guide that did not contain the statement, “An attorney or an accountant who specializes in real estate, for example, would not be a real property trade or business.”

Perhaps the reason for this change was that this is too sweeping a statement, and as Podolin notes, an attorney who is heavily involved in real estate transactions might well qualify. It's a factual thing.

Ckenefick (talk|edits) said:

5 February 2013
Right. And I do believe that's what Lenny and Libi is saying. Libi said this:

Also, I think that someone who works in-house at a real estate development or brokerage firm would be a real estate professional (assuming 5%-employee requirement is met), even if he just does legal and compliance work there.

And I said this:

Don't know. A good discussion question to bat around.

Off the cuff, I'm thinking, as Libi and Lenny are thinking, that the only possible way for this to happen is for the attorney to be "in house" and would have to own 5% of the Company. Again, this is off the cuff. My take is that if an attorney does not work in house, it's gonna be a hard battle to fight.

Agree, disagree?

Libinius (talk|edits) said:

6 February 2013
Thanks for the comments. I think it would depend on the facts and circumstances on what the attorney does. If he is just doing real estate closings, probably not. If the outside attorney works with companies like REITs to maintain REIT compliance by reviewing leases and structuring acquisitions, or he analyzes the most tax-efficient ways to acquire properties and make improvements, I think there is a reasonable argument that he is in a real property management trade or business.

Ckenefick (talk|edits) said:

6 February 2013
Unfortunately, for the management trade, you have to actually own the property under the -9 reg.

Libinius (talk|edits) said:

6 February 2013
Ckenefick, if you are referring to 1.469-9(e)(3)(ii), I think that rule only applies in determining material participation in a "rental real estate activity," but not whether that person is in the property management trade or business or is a real estate professional.

A property manager who spends 1500 hours managing other people's rental properties is a real estate professional in the management trade or business, but he would not be materially participating in a rental trade or business due to those 1500 hours (i.e., he can't use the 1500 hours as credit toward material participation for his own rental properties).

Ckenefick (talk|edits) said:

6 February 2013
That's what I meant. All those hours working for others can't be aggregated or grouped with hours spent on your own personally held properties.
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