Three years ago I’d have told you that if you paid too much in taxes, you needed to buy more real estate.
Today, that advice is just flat wrong if you’re subject to AMT (Alternative Minimum Tax)! Now, it’s even worse if you’re a real estate agent claiming the real estate professional loophole.
Here’s what the rules were three years ago: If you made under $100,000 adjusted gross income, you can deduct $25,000 in real estate losses. If you make over $150,000, you can’t deduct anything. In between, the deductible amount phases out. The exception is if you’re a real estate professional. Thousands of people then took the steps to legally qualify as a real estate professional. And now, it looks like the IRS is challenging that definition.
A primary target is the real estate agent herself. One of our TaxLoopholes community members reports that he’s currently under audit for taking the real estate professional deduction on his joint return. His wife is a real estate agent, does not have any other job and reports the commissions she receives through her legitimate business. Because she claimed the real estate professional status, they then took 100% of their real estate losses against their other income.
The IRS auditor has taken the position during the audit that because one of the requirements is that she is “brokering” deals, she isn’t qualified because she’s not a licensed broker.
Until Jonathan commented on this tactic, I hadn’t heard about it. But, then I started looking and apparently there have been a few cases of IRS auditors in California taking this position. I know of two cases that are planning to fight it in Tax Court. If they win, we’ll have a precedent that might stop the IRS tactics. But, if they lose, everyone who has claimed the Real Estate Professional loophole based on being a real estate agent needs to be prepared for an audit. Thank you Jonathan for pointing this out! Please keep us posted.