Mortgage broker is not a real estate professional.

Author:Kirk, David
Position::From The Tax Adviser

The Tax Court recently held that a mortgage broker was not a real estate professional and therefore was subject to the passive activity loss rules of Sec. 469 (Hickam, T.C. Summ. 2017-66).

During the years at issue, Kurt Hickam brokered real estate mortgages and other loans secured by real estate, both as an independent contractor and as an employee. Hickam was a licensed real estate agent, but he did not operate, develop, redevelop, construct, reconstruct, or rent real estate in brokering mortgages or originating loans. He did, however, manage and maintain various properties owned by himself and family members. Services that Hickam provided for the properties included placing ads, processing applications, inspecting conditions, and overseeing repairs and remodels. He received $6,000 annually for these services but did not keep contemporaneous records of the hours spent.

On his 2011 and 2012 tax returns, Hickam claimed rental real estate loss deductions for the properties. Upon audit, the IRS disagreed and determined that the passive activity loss rules applied, as Hickam was not a real estate professional. He argued to the court that his mortgage brokerage services and his loan origination services should be included for purposes of satisfying the real estate professional test. Additionally, he prepared a noncontemporaneous calendar for each month reflecting time spent on property management, mortgage brokerage services, and loan origination services.

Sec. 469(a) disallows a passive activity loss. Sec. 469(d)(1) defines the term "passive activity loss" as the amount by which the aggregate losses from all passive activities exceed the aggregate income from all passive activities for the year. Under Sec. 469(c) (1)(A), the term "passive activity" means any activity that involves the conduct of any trade or business in which the taxpayer does not materially participate. With the exception of real estate professionals described in Sec. 469(c)(7), Sees. 469(c)(2) and (c)(4) together consider any rental activity a passive activity, even if the taxpayer materially participates in it.

Sec. 469(c)(7)(B) provides two tests, both of which must be met, for a taxpayer to be classified as a real estate professional. 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 are performed in real property trades or businesses in which the taxpayer materially participates. The...

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