CCA affects taxpayer's ability to qualify as a real estate professional.

• Author: Bilsky, Jeffrey N.
• Position: Chief Counsel Advice

A recently published Chief Counsel Advice (CCA 201504010) provides important guidance addressing whether activities of a real estate broker or mortgage broker are considered activities in a "real property trade or business" for purposes of determining whether the person is a real estate professional under Sec. 469(c)(7). Based on guidance in this CCA, affected taxpayers may need to reevaluate whether they will meet the definition of real estate professional. The results of this analysis may have a significant impact on a taxpayer's treatment of the income from rental real estate activities under Secs. 469 and 1411.

Rental Real Estate Under Sec. 469

Under the general rules of Sec. 469(a), a taxpayer may not use losses from a passive activity to offset other nonpassive income. Sec. 469(c)(1) provides that a passive activity is any trade or business activity in which the taxpayer does not materially participate. Sec. 469(c)(2) provides further, however, that any rental activity (including rental real estate activities) will be considered passive regardless of a taxpayer's participation. In other words, a taxpayer's rental real estate activities are per se passive.

In addition to the loss limitation rules of Sec. 469, Sec. 1411 imposes a net investment income tax on certain items of passive income, including real estate rental income. Specifically, Sec. 1411(c)(1) defines the term "net investment income" to include "rents" unless they are derived from a nonpassive trade or business. Sec. 1411(c)(2) references Sec. 469 in defining a passive activity. Therefore, per se passive rental real estate income would likely be considered net investment income for purposes of the Sec. 1411 net investment income tax.

Sec. 469(c)(7) contains an important exception providing that a taxpayer's eligible rental real estate activities are not treated as per se passive for taxpayers who perform specified levels of services in real property trades or businesses. A taxpayer who qualifies under Sec. 469(c)(7) is commonly referred to as a "real estate professional. "Therefore, a taxpayer that is considered a real estate professional will be able to treat a rental real estate activity as nonpassive for purposes of the passive activity loss rides, providing that he or she materially participates in the activity under the rules described in Sec. 469(h)(1). In addition, a taxpayer that is a real estate professional potentially will not be subject to the Sec. 1411 net...