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real estate professional with two new k-1'

Technical topics regarding tax preparation.
#1
zl28  
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Have an individual who has a w2 job where she buys and sells commercial real estate; i deem her a real estate professional.

she works 70 hours per week doing this.

in 2019, she became a partner in two llc's.

The company she works for asked her to buy some residential properties, and get some investors, and she put her own money in.

She is the main personal who manages these two real estate investments.

They have losses.

I want to deduct the losses as non-passive and say she materially partricipated in those rental activities.

Do i need to make an election or do anything in order to achieve this?
 

#2
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zl28 wrote:Have an individual who has a w2 job where she buys and sells commercial real estate; i deem her a real estate professional.


That might be correct. And it might not be. Is she at least a 5% owner in the business she's employed by? IRC Sec 469(c)(7)(D)(ii).

How are the LLCs taxed for federal income tax purposes.

What is her percentage ownership in each LLC?
 

#3
zl28  
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Client works at company we're just an employee; no ownership; all she does is real estate all day.

There are two new LLC's for which she is over a 5% owner.
 

#4
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zl28 wrote:Client works at company we're just an employee; no ownership; all she does is real estate all day.


Then her W-2 hours don't count for IRC Sec 469(c)(7)(B) purposes. In fact, they count against her. If she spends 70 hours a week at this W-2, she'll need to spend over 70 hours a week in real property trades or businesses in which she materially participates (and has over 5% ownership) to qualify as an RE pro. Not impossible, but highly improbable. That would be over 20 hour work days, each day of the week.

Not likely this client is an RE pro.

zl28 wrote:There are two new LLC's for which she is over a 5% owner.


It's important to be specific here. What's over 5%? 8%? 50%?

If she owns at least 10% of the LLCs, she can apply IRC Sec 469(i) (active participation) to her interests. The downside is that this is AGI dependent.
 

#5
Nilodop  
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If I'm reading the cite from ManVsTax, she's out of luck, i.e., not a r/e professional.
 

#6
zl28  
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i though there was something where if a real estate pro on your w2 job, those hours could be counted torwards your private investments in real estate to get the non-passive treatment.
 

#7
zl28  
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looks like you can make a grouping election 1.469(c)(7)(a)
 

#8
Nilodop  
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Sec 469(c)(7)(D)
(ii) Personal services as an employee
For purposes of subparagraph (B), personal services performed as an employee shall not be treated as performed in real property trades or businesses. The preceding sentence shall not apply if such employee is a 5-percent owner (as defined in section 416(i)(1)(B)) in the employer.


zl28, please check the cite
1.469(c)(7)(a)
. It's from the Code but the cite is wrong. But either way, the above, from a bit further down in the Code, negates it in OP's facts.
 

#9
zl28  
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Great help - thank you Man and Nilo!!....i see she has to be a 5% owner in the company she is employed in...not just that the llc's invested in...very interesting - thank you!!
 

#10
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Again, keep in mind you may still be able to apply 469(i) on an activity by activity basis as long as she owns at least 10% interest.

It won't turn the income stream non-passive, but maybe some passive loss will be allowed depending on AGI.
 

#11
zl28  
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How about the fact that my client does substantially all of the work to manage these 2 investment properties. Only catch is, she does it in her capacity as an employee of the firm she works for.

My client works at a real estate firm.

She mainly sells distressed real estate.

Her boss asked her to raise funds and form 2 new entities to buy rental properties.

She put her personal funds into the rental properties.

She does more to manage those 2 properties than anyone else, however....she does this on her job which pays her a few hundred thousand......

Do we think can make non passive under this test?
 

#12
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zl28 wrote:Do we think can make non passive under this test?


What "test"?
 

#13
zl28  
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Tests for determining material participation

Tests for Determining Material Participation
Material participation occurs when the taxpayer's involvement in the trade or business (or rental real estate activity for real estate professionals as discussed in Key Issue 16H) is regular, continuous, and substantial [IRC Sec. 469(h)(1)]. Reg. 1.469-5 and Temp. Reg. 1.469-5T establish guidelines to determine material participation. Any work an individual performs in an activity in which he or she owns an interest (when the work is done) generally is considered participation. However, not all participation is considered material; see the discussion of “Nonqualifying Participation” later in this key issue. An individual materially participates in an activity if any one of the following tests is met:

1. More Than 500 Hours Test. The taxpayer participates in the activity for more than 500 hours during the year.

2. Substantially All Participation Test. The taxpayer's participation in the activity constitutes substantially all of the participation by all individuals (including nonowners) in the activity for the year.

3. More Than 100 Hours Test. The taxpayer's participation is more than 100 hours during the year, and no other individual (including nonowners) participates more hours than the taxpayer. (See Example 16B-1.)

4. Significant Participation Activity (SPA) Test. The activity is a significant participation activity in which the taxpayer participates for more than 100 hours during the year and the taxpayer's annual participation in all significant participation activities is more than 500 hours. [A significant participation activity is generally a trade or business activity (other than a rental activity) that the taxpayer participates in for more than 100 hours during the year but does not materially participate (under any of the material participation tests other than this test).] (See Example 16B-3.)

5. Prior-year Material Participation Test. The taxpayer materially participated in the activity for any five tax years (whether or not consecutive) during the 10 immediately preceding tax years. (See Example 16B-2.)

6. Personal Service Activity Test. For a personal service activity, the taxpayer materially participated for any three tax years (whether or not consecutive) preceding the current tax year. (Personal service includes the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital is not a material income-producing factor.)

7. Facts and Circumstance Test. Based on all the facts and circumstances, the taxpayer participates on a regular, continuous, and substantial basis during the year [Temp. Reg. 1.469-5T(a)(7)]. Future regulations are to provide further guidance for this test. However, temporary regulations indicate that if an individual participates in an activity for 100 hours or less during the year, this “facts and circumstances” test is not available. Participating in the management of an activity is not considered for this test if (a) any person (other than the taxpayer) received compensation for performing services in the management of the activity, or (b) any individual spent more hours during the tax year performing management services than the taxpayer (whether or not the individual was compensated for the management services).
 

#14
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Rental real estate activities are per se passive. IRC Sec 469(c)(2).

A taxpayer may rebut this baseline presumption if, and only if, they are a real estate professional. IRC 469(c)(7). Only a real estate professional may apply the material participation tests you listed to a rental real estate activity (or aggregation of RRE activities) for a passive/non-passive determination.

Otherwise -- IRC Sec IRC Sec 469(c)(2) prevails. Again, the best you can hope for is the allowance under IRC Sec 469(i).

So I'll ask you -- is your client a real estate professional, as determined under IRC Sec 469 and the related regs? That's really what we're dealing with here.

I advise you to read all of the cites in this thread.
 

#15
zl28  
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Thank you - appreciate guidance - she's locked out of being non-passive based on above.

She's not a 5% owner in the entity that employs her; she is a 0% owner.

469(i) is out of the question b/c she earns several hundred thousand.

Thank you again!!
 


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