Wednesday, October 11, 2017
Mortgage broker not qualified as a real estate professional
Hickam, TC Summary Opinion 2017-66
Passive Loss Rules
Under IRS code section 469 all real estate activities are considered passive and any losses related to such activities are disallowed or can only be offset by passive income. The passive loss rules/limitations are different if a taxpayer qualifies as a real estate professional. If a taxpayer qualifies as a real estate professional and materially participates, the loss disallowance doesn’t apply and the taxpayer’s rental real estate activity, if conducted as a trade or business, is not treated as a passive activity.
A taxpayer qualifies as a real estate professional if: (1) more than half of the personal services that the taxpayer performs during that year are performed in real property trades or businesses in which he materially participates with 5% ownership; and (2) the taxpayer performs more than 750 hours of services during that tax year in real property trades or businesses in which he or she materially participates.
"Real property trade or business: 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.”
During 2011 and 2012 the taxpayer brokered real estate mortgages and other loans as an independent contractor for a mortgage brokerage company. During this time, the taxpayer brokered and originated loans for clients to buy real estate, refinanced existing loans, and secured reverse mortgages, commercial loans and sometimes construction loans. Taxpayer did not operate, develop, construct, or rent real estate in brokering mortgages or originating loans.
During this same period, the taxpayer actively managed and maintained three rental real estate properties. The taxpayer claimed he was a real estate professional for tax purposes by brokering and originating mortgages.
Chief Counsel Advice 201504010 states that a real estate agent who brings together buyers and sellers of real property can be deemed a real estate professional who is engaged in a real property brokerage trade or business, however a mortgage broker who is a broker of financial instruments is not engaged in a real property brokerage trade or business.
Despite this Chief Counsel Advice, the IRS contended the IRC 469 is clear that mortgage brokerage and loan origination services were not real property trades or businesses. IRS argued that the CCA, rather than establishing a new interpretation of the law, correctly relied upon the statute.
The Court, basing its conclusion on its interpretation of the Code and not on the Chief Counsel Advice, determined that services related to brokering and originating loans do not fall under the definition of operation or brokerage of real property. Neither his mortgage brokerage services nor his loan origination services constituted real property trades or businesses for purposes of IRC 469.
Although the taxpayer worked closely with real property with brokerage services and loan origination services, this did not qualify him as a real estate professional under the real estate passive loss rules. The passive loss rules under IRC 469 continue to be very complex. Proper tax planning involves the proper fact gathering.
Greg I. Nelson, CPA, MBT; Ryan Kelly, CPA, MBT, Mark Angell, CPA, MBT
Olsen Thielen CPAs
Greg Nelson, CPA, MBT
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