Posted by: Cory Stigile | March 21, 2016

“Mortgage Brokerage” Does Not Constitute A “Real Property Trade Or Business” by CORY STIGILE

In Guarino v. Commissioner, T.C. Summary Op. 2016-12 (March 14, 2016), the Tax Court held that the taxpayer was not a real estate professional for purposes of the passive loss rules because the hours he spent on his “mortgage brokerage business” did not constitute hours spent in a “real property trade or business” pursuant to IRC Section 469(c)(7)(C).

The taxpayer in Guarino owned multiple real estate properties that he held for rent and/or rented out during the years at issue.  The taxpayer also had a multifaceted sole proprietorship that provided services, including the preparation of tax returns and the brokering of real estate mortgages.  The brokerage service included the originating and servicing of residential and commercial real estate loans.  Although the taxpayers did not produce contemporaneous prepared logs to track their real estate activities, a variety of logs were prepared and submitted during the examination, appeals, and litigation process.

Rental real estate activity is generally reportable as a per se passive activity.[i]  Such losses are restricted in how and when they may be utilized to offset non-passive income.[ii]  Under the “real estate professional” exception, rental activity is not treated as per se passive provided that the taxpayer satisfies the following two requirements:

  1. more than one-half of the personal services performed in trades or businesses by the taxpayer during such taxable year are performed in real property trades or businesses in which the taxpayer “materially participates,” and
  2. such taxpayer performs more than 750 hours of services during the taxable year in real property trades or businesses in which the taxpayer materially participates [iii]

“Real Property Trade or Business.” A taxpayer is treated as “materially participating” in an activity if the taxpayer participates for more than 500 hours per year on the rental activity,[iv] but the Court did not get to this step of considering material participation because it did not consider the taxpayer to be in a real property trade or business such that the real estate (rental) activities could be aggregated.   A real property trade or business is defined as “any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.”[v]  (Emphasis supplied.)

Here, the taxpayer spent a considerable amount of time in his business of providing brokerage services and asserted that the “brokerage trade or business” hours fell within the real property trade or business definition. The Court ultimately determined that the taxpayer’s business was brokering financial services, not real estate.  The Court cited legislative history to support this distinction and pointed out that Congress considered including “financing operations” in the activities listed in section 469(c)(7)(C) but specifically did not do so.  As the taxpayer did not maintain contemporaneous substantiation, the Tax Court was not able to and did not make a determination regarding how much if any of his time was dedicated to a real property brokerage.  Accordingly, while aspects of real estate financing may be an important part of a real estate professional’s trade or business, the opinion did not need to address the issues of whether such hours should be included for purposes of qualifying as a real estate professional.

Maintain Log to Identify Specific Activities Conducted. As with other recent cases, Guarino stands as a helpful reminder about the importance of maintaining contemporaneous logs of hours spent in a real estate business.  When the scope and nature of the time spent on a real estate activity may be unclear, such as in a more complex real estate business activity, it may be helpful to keep additional records to differentiate between the specific activities conducted during the year.

CORY STIGILE – For more information please contact Cory Stigile –  Mr. Stigile is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a CPA licensed in California, the past-President of the Los Angeles Chapter of CalCPA and a Certified Specialist in Taxation Law by The State Bar of California, Board of Legal Specialization. Mr. Stigile specializes in tax controversies as well as tax, business, and international tax. His representation includes complex and sensitive civil tax audits and tax litigation, including tax-related examinations and investigations of individuals, business enterprises, partnerships, limited liability companies, and corporations. Additional information is available at

[i] IRC § 469 (c)(2).

[ii] IRC § 469 (a).

[iii] IRC §469(c)(7)(B).

[iv] IRC § 1.469-5T(a)(1).

[v] IRC § 469(c)(7)(C).  See sec. 1.469-5T(a)(1)

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