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By C. Anthony Phillips, CPA
Member of the GRI State Faculty 

Assume you are a full-time REALTORŪ (or someone who materially participates in a real property trade or business) and meet the eligibility tests. Also assume that you have an adjusted gross income of $155,000 and a $30,000 yearly rental real estate loss. Assume a non-REALTORŪ becomes your spouse. Also assume that the non-REALTORŪ spouse has an adjusted gross income of $150,000 and an apartment house which produces $15,000 in passive losses per year. Prior to marrying you, your non-REALTORŪ spouse would have not been able to deduct their $15,000 in passive losses from rental activities.

Because you meet the eligibility tests, you are allowed to deduct your $30,000 rental real estate loss even though your adjusted gross income exceeds $150,000. Because your non-REALTORŪ  spouse is married to you and elects to file a joint return, your non-REALTORŪ  spouse is also allowed to deduct their otherwise non deductible $15,000 in rental real estate loss. Your non-REALTORŪ  spouse clearly benefits by being married to you because they are permitted to deduct $15,000 of rental real estate loss they would have otherwise been unable to deduct.

The tax code contains a number of provisions which heavily penalizes married couples. Section 469 (c)(7) of the Internal Revenue Code seems to be one of the few areas of the tax code which encourages marriage. Not only does it encourage marriage, but it appears to encourage marriage to a REALTORŪ.


Material Participation

Material participation in addition to several other requirements, requires that the individual be involved in the operations of the activity on a regular, continuous and substantial basis.


Real Property Trade or Business

This means any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing or brokerage trade or business.

Some taxing authorities think you have to be a broker to get this benefit, but this is currently in tax court being decided.


Eligibility Tests

A full time REALTORŪ  will satisfy the eligibility requirements when:

1. more than 50% of the REALTORŪ 's personal services during the tax year is performed in real property trades or businesses in which the REALTORŪ  materially participates, and

2. the REALTORŪ  performs more than 750 hours of service in those same trades or businesses.


Spouses

If one of the spouses in a joint return meets the eligibility requirements of service in real property business, then the eligibility rules apply to the joint return.


Aggregation of Activities

Each interest of a REALTORŪ  in rental real estate is to be considered a separate activity and the REALTORŪ  may elect to treat all interest in rental real estate as one activity. A REALTORŪ  who spends 450 hours in real estate rental operations and also spends 700 hours in real estate brokerage and sales would aggregate both activities to meet the material participation rules.


Treatment of Employees

In applying this eligibility test, the personal services of an employee is not counted unless the employee is also a five-percent owner of the corporation's outstanding stock. A REALTORŪ  who is an independent contractor and receives a Form 1099 instead of Form W?2 would not be considered an employee.






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