R/E Agent a Real Estate Professional?

[Rondi]

I've been doing research, but still have questions about a client I am meeting with tomorrow. The Wife is a licensed R/E agent (not a broker). the Husband has a full-time day job.
In 2011, we filed their return, and split the net profits as a Qualified Joint Venture. They have not made any changes to the business entity (No LLC, S-Corp, etc, elections have been made to date.)

Now in 2012, they jointly purchased two houses which have been rented out.
I know I can elect to aggregate both properties together in order to meet the 750 hour requirement; but until I speak with them, I'm not sure if they will qualify with the hours, based on just the 2 rentals.

Here are my few questions that I'm hoping for guidance on:
Last year, in a CE course that I took through Gear Up, the speaker talked about a case that was in front of the tax courts, to determine if the business of R/E Agent qualified under the term "Broker". I have not found anything that tells me if and how this case was settled, and am trying to determine if the Wife's activities as an Agent can be considered when meeting the 750 hours.

Can the Husband's hourly participation, along with the Wife's, be counted towards the 750 hours? (I don't think so, but thought I'd ask for opinions anyway).

Lastly, I keep reading "materially" participate and "actively" participate. Are these terms interchangable or do they have different meanings in the world of Real Estate Professional?
Thanks for any insight and/or guidance. Much appreciated, Rondi

[ddoshan]

I will be of little help. Do wonder where the joint venture comes in. Wife is a R/E agent and husband has a full time day job. Also in the past I read and studied all sorts of material and came to the conclusion that no one I do will be or qualify as a R/E professional. Just plain to complicated to understand as to just who may qualify and even if they do you potentially run into all sorts of complicated situations. So in my world there would be a Sch C for the R/E sales and just normal Sch. E's for their rentals and would not try to link or combine the two under one umbrella.

Thinking about it, I guess I did have one client several years ago where I / we went that route for 3-4 years and I was sort of relieved when he basically went out of business and I no longer had that headache.

[AZ-Tax]

About 3 yrs ago

About 3 yrs in the middle of the summer I had taxpayer walk in who received a letter from the IRS disallowing the taxpayer his "Real Estate Professional" he filed on his tax return. I was not the orginal preparer on this TP's return so when I asked why he does not go back to the tax preparer that prepared the tax return, his reply was he is out of business and even if he was, he would not go back to him. I was able to cut his Fed tax bill down to 60% of what he owed but I recall both the taxpayer and his wife were working a full time W-2 job. Hard to believe the tax preparer signed his name to that return.

[Rondi]

According to the T/P's, the husband assists the wife, keeps his own mileage log, and participates 30% in the operation ....They market themselves as "Spouses Selling Houses". Now that I think of it, the husband might very well be licensed as well. I'll have to look at my notes.

As for the Real Estate Professional, no doubt they've been getting "good" advice from others in their field. I meet with them tomorrow afternoon, and will listen to their story (and try to discourage them).....we'll see.
Appreciate it, Rondi

[Burke]

The terms "real estate agent" and "real estate professional" are not synonymous. To qualify as a "real estate professional," one must meet the requirements of hours and responsibilities. The R/E/P qualification is primarily used to qualify to deduct losses in excess of the $25K limit for AGI's over $150K on rental properties owned by that person(s) who would normally file a Sche E. Each rental activity is considered separately unless you elect to treat all your interests in rental real estate as one activity. And you would file a Sche C in that case which would allow a loss. Whether or not either one of them is licensed is immaterial. The rule also states "do not count your spouse's personal services to determine whether you [meet] the requirement." However, you can count the spouse's time in order to determine whether you materially participate. In addition, more than half of the personal services in all trades and businesses [must be] performed in real property trades or businesses in which you materially participate. You need to see Pub 527, chapter 3 for all the ins and outs. It sounds like she may qualify as REP, but he does not.

A real estate agent is generally an independent contractor who gets a 1099MISC and files a Sche C while deducting expenses related to that particular activity from which the 1099 income is generated.

[taxea]

Check state law on real estate agents. If the husband does not have a license he may not be qualified to sell houses. If the wife is a real estate agent then she should be filing a Sch C for that related business. What kind of work does the husband do as it relates to her real estate business. Rentals are personal. Unless the couple provides services in addition to renting the houses, they are reported on Sch E's.

In many cases spouses are considered a single entity.