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What Is a Real Estate Professional and Why It Means so Much Today

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Submitted By kevinleifer
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What Is a Real Estate Professional and Why It Means So Much Today
By Kevin Leifer, CPA, JD, LL.M. (Tax), MBA
Director – Tax and Real Estate
Gettry Marcus CPA, P.C.

Background
The real estate industry was dealt a severe body blow in 1986 when Congress enacted the passive activity rules which provided that losses from a passive activity could only be deducted to the extent of the taxpayer’s net income from other passive activities. Excess passive losses are not deductible until such time as the taxpayer generates net passive income or disposes of the interest in the loss activity.
While these rules were originally intended to limit losses related to activities in which the investor was merely a passive investor (such as abusive tax shelters), real estate was hit particularly hard for two reasons: (i) rental real estate activities (RREAs) traditionally generate tax losses even from rental properties that generate positive cash flow predominantly because depreciation (a non-cash deduction) is usually a material deduction in calculating the property’s taxable income or loss; and (ii) RREAs were deemed to be per se passive activities.
As a result, the real estate industry was up in arms and rightfully so. After all, many real estate entrepreneurs and others were actively engaged in RREAs on a full-time basis. How could Congress treat them like passive investors? As a result, the real estate professional rules were enacted in 1993.
What is a Real Estate Professional (REP)
To be a REP, two requirements must be satisfied: (1) more than one half of the taxpayer's “personal services” during the taxable year must be performed in “real property trades or businesses” in which the taxpayer materially participates for the year; and (2) the taxpayer must perform more than 750 hours of services during the taxable year in real property trades or businesses in which the

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