ou may be familiar with the Real Estate Professional election, which allows qualified by Richard Hart Y Passive Losses WILL THE IRS BELIEVE THAT YOU ARE REALLY A REAL ESTATE PROFESSIONAL?

or businesses that qualifies one to be a real estate professional. Despite not having made the election to be treated as a real estate professional, Dolores treated the losses from her two rental real estate investments as non-passive for 2006 and 2007. Her tax returns were selected for audit, and the IRS challenged the non- passive treatment of her losses. By not making the real estate professional election, and also by not maintaining complete and accurate time records to document her level of participation, she lost this case. The issue at hand in the Gragg case was whether Mrs. Gragg, a real estate professional, remained subject to the material participation requirement that would apply to other situations where a taxpayer incurs passive losses. As the court pointed out in its opinion, the law specifically states that the taxpayer must materially participate in each activity in order to avoid passive loss treatment. Therefore, merely qualifying as a real estate professional, whether or not the real estate professional election is made, does not inherently result in your rental real estate

taxpayers in a real property trade or business to deduct their rental real estate losses against their other income earned on a tax return. Examples of these types of trades or businesses are real property development, construction, rental, management, leasing, and brokerage. This is a great advantage for a real estate professional because typically, if you have a loss on your rental property, it can only be used against a gain from another rental property or other ‘passive activity.’ While the election must be made in order to aggregate all of one’s rental real estate activities, as well as for such losses to be treated as non-passive, the real estate professional must also continue to achieve material participation in their rental real estate activities. Let’s look at a U.S. District Court case, recently decided in appeals, that illustrates this requirement. In Gragg v. United States, Dolores Gragg was a real estate agent, one of the real property trades

56 | think realty magazine :: may 2020

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