Does plumbing contracting qualify as RE professional trade?

Technical topics regarding tax preparation.
#1
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Does a commercial plumbing contractor meet the definition of a trade or business that qualifies as a Real Estate Professional?
 

#2
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taxpro99 wrote:Does a commercial plumbing contractor meet the definition of a trade or business that qualifies as a Real Estate Professional?


No
~Captcook
 

#3
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Double no.
 

#4
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I wouldn’t be so quick to dismiss this. Section 469(c)(7)(C) defines a “real property trade or business” as follows:

(C) Real property trade or business.---For purposes of this paragraph, the term “real property trade or business” means any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.

I have highlighted the word “construction” because if the commercial plumbing contractor’s business is to install the plumbing in the construction of new homes or commercial buildings, then this might meet the definition of a business that can qualify to be a real estate professional.


See #7 below.
Last edited by NoCalCPA85 on 21-May-2024 11:11am, edited 2 times in total.
 

#5
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I was thinking similarly about development. Now that they have enumerated the various building systems, where one being plumbing, does anything bar the various trades from being considered RE trades. Does it matter how much of the plumbing company's business is development (or construction) vs. how much are repairs? I think so.

I also think you are in unchartered waters (subject to further legal research like the principle test). However, the facts may suggest no danger depending on your client.
Last edited by Terry Oraha on 21-May-2024 9:46am, edited 2 times in total.
 

#6
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Maybe the principle test. i.e. More than 50% of revenue and time.
 

#7
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After reading the Regs, I’m reversing my opinion as stated in #4. This is because plumbing fixtures installed in a new home or commercial building, before they are installed, is not “real property.” See Reg. 1.469-9(b)(2)(i)(A) and (C):

(i) Real property.---(A) In general.---The term real property includes land, buildings, and other inherently permanent structures that are permanently affixed to land. Any interest in real property, including fee ownership, co-ownership, a leasehold, an option, or a similar interest is real property under this section. Tenant improvements to land, buildings, or other structures that are inherently permanent or otherwise classified as real property under this section are real property for purposes of section 469(c)(7)(C). However, property manufactured or produced for sale that is not real property in the hands of the manufacturer or producer, but that may be incorporated into real property through installation or any similar process or technique by any person after the manufacture or production of such property (for example, bricks, nails, paint, and windowpanes), is not treated as real property in the hands of any person (including any person involved in the manufacture, production, sale, incorporation or installation of such property) prior to the completed incorporation or installation of such property into the real property for purposes of section 469(c)(7)(C) and this section.

(C) Inherently permanent structure.---The term inherently permanent structure means any permanently affixed building or other permanently affixed structure. If the affixation is reasonably expected to last indefinitely, based on all the facts and circumstances, the affixation is considered permanent. However, an asset that serves an active function, such as an item of machinery or equipment (for example, HVAC system, elevator or escalator), is not a building or other inherently permanent structure, and therefore is not real property for purposes of section 469(c)(7)(C) and this section, even if such item of machinery or equipment is permanently affixed to or becomes incorporated within a building or other inherently permanent structure. Accordingly, a trade or business that involves the manufacture, installation, operation, maintenance, or repair of any asset that serves an active function will not be a real property trade or business, or a unit or component of another real property trade or business, for purposes of section 469(c)(7)(C) and this section.

Furthermore, the work that a commercial plumbing contractor does can’t be considered “real property development” due to Reg. 1.469-9(b)(2)(ii)(A):

(A) Real property development.---The term real property development means the maintenance and improvement of raw land to make the land suitable for subdivision, further development, or construction of residential or commercial buildings, or to establish, cultivate, maintain or improve timberlands (that is, land covered by timber-producing forest). Improvement of land may include any clearing (such as through the mechanical separation and removal of boulders, rocks, brush, brushwood, and underbrush from the land); excavation and gradation work; diversion or redirection of creeks, streams, rivers, or other sources or bodies of water; and the installation of roads (including highways, streets, roads, public sidewalks, and bridges), utility lines, sewer and drainage systems, and any other infrastructure that may be necessary for subdivision, further development, or construction of residential or commercial buildings, or for the establishment, cultivation, maintenance or improvement of timberlands.
 

#8
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Nice work NoCalCPA!
 

#9
MWEA  
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I second the nice research done by NoCalCPA, great work!

I started researching the same topic earlier today before deciding to check here. My PPC manual stated it’s reasonable to think electricians, plumbers, and other subcontractors could be considered real estate professionals but it would be better to get a private letter ruling if the numbers justify it. It states absent further guidance, tax professionals won’t have clear cut guidance.

In Sezonov v. Commissioner it states an HVAC contractor wouldn’t qualify. That fits with the research stated in the above post. I’m having a hard time wrapping my head around what type of contractors would or would not qualify.

HVAC = no
Plumber = likely no
Electrician = likely no if using the same logic as no to plumbing?
Roofer?
Framer?
Remodeler?
Flooring installer?
Millwork?

Don’t they all install items that are not real property until they are actually installed?
 

#10
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All buildings (and every part of the building) are an aggregation of tangible personal property fixed permanently so as to become something else. That something else is a real property. So i am guessing that we can say with confidence a person can qualify as a RE prof if (in their trade) they are someone who can affect the property as a whole (or sub component of a building). Like general contractor, developer, project manager, etc. These are people who can affect the "building" as a whole.

Let's say the entire plumbing systems is a component of building real estate. If the GC delegates the responsibility to build the whole plumbing system to a sub in the course of the building construction then that is development even if it is by a plumber or plumbing company. Because they are operating on the building as a whole. Not every plumber is licensed to build a building's plumbing system. I believe they need to have a general contractors license. This to me is where i believe the line is drawn in the absence of more clear guidance.
 

#11
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MWEA wrote:In Sezonov v. Commissioner it states an HVAC contractor wouldn’t qualify.

I think that you may have misread the Sezonov case.

In Sezonov v. Commissioner, T.C. Memo. 2022-40, Mr. Sezonov operated a wholesale HVAC business, but he didn’t claim that his HVAC business was a “real property trade or business” as defined in section 469(c)(7)(C). The taxpayers claimed that only their Florida rentals was a “real property trade or business.”

The Tax Court noted that based on their own logs, they spent less than 750 hours on their rentals, and therefore, they didn’t qualify as real estate professionals. In fact, the Court noted that they failed the 50% test of section 469(c)(7)(B) because Mr. Sezonov spent less time on the rentals than on his HVAC business, which indicates that the Court considered his HVAC business to NOT be a “real property trade or business.”

https://scholar.google.com/scholar_case?case=17645631865952397205&hl=en&as_sdt=6&as_vis=1&oi=scholarr
 

#12
MWEA  
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Thanks NoCal, you are correct on the case. I was also pointing out that HVAC does NOT count.
 

#13
MWEA  
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Terry Oraha wrote:All buildings (and every part of the building) are an aggregation of tangible personal property fixed permanently so as to become something else. That something else is a real property. So i am guessing that we can say with confidence a person can qualify as a RE prof if (in their trade) they are someone who can affect the property as a whole (or sub component of a building). Like general contractor, developer, project manager, etc. These are people who can affect the "building" as a whole.

Let's say the entire plumbing systems is a component of building real estate. If the GC delegates the responsibility to build the whole plumbing system to a sub in the course of the building construction then that is development even if it is by a plumber or plumbing company. Because they are operating on the building as a whole. Not every plumber is licensed to build a building's plumbing system. I believe they need to have a general contractors license. This to me is where i believe the line is drawn in the absence of more clear guidance.


Terry, appreciate the perspective. The other problematic part is the “active system” language in C. Even if a plumber does an entire building, is it an “active system” due to water continually flowing through it? Same with electrical? I agree with your thought process on it being geared towards the overall GP as being eligible.
Last edited by MWEA on 17-Jan-2025 2:59pm, edited 1 time in total.
 

#14
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I appreciate your perspective MWEA. While drilling down on the meaning of "active function" I discovered that this -9 reg was amended in 2020 where that new language was inserted. Before that it had this:

(b) Definitions. The following
(2) Real property trade or business.
Real property trade or business is
defined in section 469(c)(7)(C).


That's all there was and then i started wondering what is going on. It seems clear that this reg was amended in association with the 163(j) regs because electing real estate property trade or business can elect out of the 163j regs, and my guess is that they did not want all the various sub-contracting industries to be free to say they are not subject to 163j. It's curious to think how should a new law like 163j affect a long standing interpretation of 469? Therefore I'm not sure if i can automatically sign off on the validity of this reg without more research. You are right to be thinking about what this "active" word means. I think it was not meant to disturb the 469 meanings, however, if we assume this reg is valid i believe what they're looking for is a machine inside of a machine. For example, the building is itself a machine (broadly speaking). What they are looking for is a machine inside a machine. They have specifically named these items HVAC, elevatore, etc. therefore, we only know that these things apply to the term "active". And this is especially so because they are essentially just making up stuff as they go. They could easily expand it to include moving water or moving electricity, personally i don't agree with their interpretations about elevators and HVAC. But since they're just make it up they could expand it to plumbing and elecricity. However, that doesn't not appear to be their intention at this time.
 


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