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IRS is Going After Real Estate Professionals

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Diane Kennedy

Bronze Contributor
Aug 31, 2007
I've been following this developing story all week. The IRS is specifically targetting people who claim real estate professional status.

First the background: If you have a real estate losses, you are limited to taking $25K against your other income if you have less than $100,000 adjusted gross income. If you make over $150K, you can't take any of the real estate losses. Between $100K - $150K, it phases out. The loophole was real estate professional status. If you're a real estate professional (defined as someone who spent more time in real estate activities than any other active business or job and had at least 750 hours per year in real estate activities) you can take all the losses against the income, no matter how much the losses or how much the income.

One of the allowed real estate activities is "brokering" real estate sales. Based on that, real estate agents have claimed real estate professional status. (By the way, that makes complete sense to me.) In a handful of CA based cases, the IRS is challenging the right of real estate agents to claim the status. Their argument is that an agent is not a broker, so they can't "broker" a deal. There are two CPAs (that I'm aware of) that are fighting this one, preparing for Tax Court right now. Their argument is that you don't have to be a licensed "broker" to broker a deal. Broker is a verb, not a licensed activity.

IRS's strategy appears to be to try to win this one in Court and set precedent. Then everybody look out!

One more proof that the day of real estate investing loopholes is ending. The new loophole source? Start a business!!

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Bronze Contributor
Read Millionaire Fastlane
Aug 29, 2007
Aurora, Co
Diane, thanks for the update on this.

I am very new to the RE field, but having my bases covered early will help me later on. I will begin tracking my time immediately. Do you have any recommendations on how to do this to help if ever audited?

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