The U.S. Tax Court just ruled that mortgage brokers do not legally qualify as real estate professionals. In a recent case, mortgage professional Kurt Hickam claimed rental real estate loss deductions, but those deductions were disallowed by the IRS because passive activity loss rules apply to anybody who is not a real estate professional.
- Mortgage brokers do not legally qualify as real estate professionals
- Real estate professionals are exempt from passive activity loss rules
- Passive activity loss rules limit rental real estate deductions
A recent court case ruled that most mortgage professionals do not legally qualify as real estate professionals. The ruling comes as mortgage broker Kurt Hickam, who owns and operates three rental properties with family, tried to claim full rental real estate loss deductions on two of his properties. Unfortunately, Hickam doesn’t legally qualify as a real estate professional, so passive activity loss rules limit his potential loss deductions.
When the IRS audited Hickam, they found they he claimed rental real estate loss deductions of $47,730 and $48,945 for 2011 and 2012, respectively. Although Hickam’s family paid him $6,000 annually for property management services, he still did not pass the two legal tests required to qualify as a real estate professional. As a result, a court ruled that Hickam had deficiencies in Federal income tax of $9,752 and $16,475 for 2011 and 2012, respectively.
The law provides two tests that people must meet to qualify as real estate professionals.
“The first test is met if more than one-half of the personal services performed in trades or businesses by the taxpayer during the tax year is performed in real property trades or businesses in which the taxpayer materially participates,” according to The Tax Adviser.
“The second test is met if the taxpayer performs more than 750 hours of services during the year in real property trades or businesses in which the taxpayer materially participates.”
Mortgage origination and brokering services do not qualify as services performed in real property trades or business. Finance operations, like brokering home loans, were included in the initial list of qualifying real property trade or business activities. In 1993, however, Congress removed “finance operations” and “appraisal” from the list.