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!
 


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