the "real estate professional" and grouping elections

[Stephen Sawrie]

As always, my apologies for overly basic/simple questions, although I am not sure this one would qualify for either. My apologies also for the length of this post, typos, etc. Anyway, here goes…

I am trying to establish my nonworking wife as a “real estate professional.” While I say she is non-working, she does an enormous amount of work with researching, acquiring, financing, and managing our properties, among other things. I know that this topic has been discussed frequently in the past, and I am aware of the basic requirements set forth in many of the superficial articles discussing the topic. However, I stumbled on an excellent article outlining these requirements from a tax code and tax court perspective (http://www.forbes.com/sites/anthonynitti/2014/07/09/tax-geek-tuesday-the-irs-finally-figures-out-the-real-estate-professional-rules/#699c23d84760) and it has led to a question or series of questions that I would like to pose to the community as I want this to be airtight. I will try to significantly shorten the article by pointing out the highlights which then form the basis of my question.

The often cited two quantitative tests from Section 469(c)(7):

1. More than one-half of the personal services you perform in all trades or businesses for the tax year must be performed in real property trades or businesses in which you materially participate (you must spend more hours on real estate activities than non-real estate activities, to prove that you earn your living in the real estate world), and

2. You must perform more than 750 hours of services during the tax year in real property trades or businesses in which you materially participate.

How to establish “material participation” (Section 1.469-5T):

1. You participate in the activity for more than 500 hours during the year,

2. Your participation in the activity constitutes substantially all of the participation by all individuals (including non-owners) in the activity for the year,

3. Your participation is more than 100 hours during the year, and no other individual (including non-owners) participates more hours than the taxpayer,

4. The activity is a significant participation activity in which you participate for more than 100 hours during the year and your 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 you participate in for more than 100 hours during the year but do not materially participate in (under any of the material participation tests other than this test),]

5. You materially participated in the activity for any five tax years (whether or not consecutive) during the 10 immediately preceding tax years,

6. For a personal service activity, you materially participated for any three tax years (whether or not consecutive) preceding the current tax year, or

7. A generic facts and circumstances test.

Putting it all together:

1. Participate in a real property trade or business as defined by the statute.

2. Materially participate in that real property trade or business under one of the seven tests of Reg. Section 1.469-5T.

3. The time spent participating in real property trades or businesses—but only those real property trades or businesses in which the you materially participate—must exceed the time you spend in non-real property trades or businesses; i.e., your day job.

4. The time spent participating in real property trades or businesses—but only those real property trades or business in which you materially participate—must exceed 750 hours.

By achieving these four requirements it is my understanding that one can safely be called a “real estate professional” in the eyes of the IRS. However, if you continue reading the article, this is only the first step in being able to declare losses on one’s W-2. The next step is proving that you materially participate in YOUR RENTAL ACITIVITIES, and this is where it gets tricky (he gives examples in the article of how one might qualify as a real estate professional but not prove material participation in his/her specific properties).

SO….this is easy if you only have one property, but becomes more difficult if one owns multiple properties, where it might appear that you are expected to spend at least 500 hours materially participating in EACH property. He therefore goes on to discuss two different grouping elections (Section 1.469-4 & Section 1.469-9) in which you group your properties such that material participation in your rental activities can be summed across all properties. He cites several court cases that examined this very issue.

Question(s): Has anyone out there taken the step of a grouping election for their multiple properties, and if so could you elaborate. For instance, how is it done? Is it just an addendum to one’s articles or OA? What has your CPA or tax atty had to say about this if you have pursued something similar? Is attaining “real estate professional” status even worth it? It is my understanding that it comes into play only if you take losses for the year with your rentals, in which case you can deduct from your personal (active) income.

Stream of consciousness is also welcome.

Thanks in advance.