Taxpayer Is Not a Real Estate Professional

By James A. Beavers, J.D., LL.M., CPA, CGMA

Expenses & Deductions

The Tax Court held that a married taxpayer who filed a separate return did not qualify as a real estate professional through attribution of her husband's activities, and therefore she could not deduct her rental real estate losses.


During 2008, Julie Oderio was married and worked full time for a real estate investment company. She also owned a rental property in San José, Calif. She filed an income tax return in 2008 claiming married filing separately status.

Oderio's 2008 return included a deduction for a rental loss of $29,583 (rental loss) for the San José rental property. She took the position that she qualified as a real estate professional, so the loss was nonpassive. The IRS examined Oderio's return and issued her a deficiency notice disallowing the rental loss deduction. Oderio challenged the IRS's determination in Tax Court.

The Tax Court's Holding

The Tax Court held that Oderio's rental loss was a passive loss under Sec. 469 and she could not deduct the loss in 2008. Specifically, the court found that she misinterpreted Sec. 469 and the underlying regulations in arguing that her husband's activity should be attributed to her in determining whether she was a real estate professional.

The court explained that rental activity is generally treated as per se passive regardless of whether a taxpayer materially participates in the activity under Sec. 469(c)(2). However, a taxpayer's rental activity is not treated as per se passive if he or she satisfies the requirements to be considered a real estate professional in Sec. 469(c)(7)(B). A taxpayer is a real estate professional for a year if:

(i) more than one-half of the personal services performed in trades or businesses by the taxpayer during the taxable year are performed in real property trades or businesses in which the taxpayer materially participates, and

(ii) the taxpayer performs more than 750 hours of services during the taxable year in real property trades or businesses in which the taxpayer materially participates.

In the case of a joint return, these requirements are satisfied if and only if either spouse separately satisfies both requirements.

Oderio conceded that she did not separately satisfy the real estate professional requirements. However, she argued that her husband did, and therefore she satisfied the requirements. Oderio argued that under Temp. Regs. Sec. 1.469-5T(f)(3) and Regs. Sec. 1.469-9(c)(4), her husband's activities should be attributed to her for purposes of satisfying the real estate professional requirements, regardless of whether they filed a joint return.

Temp. Regs. Sec. 1.469-5T(f)(3) treats the participation of a taxpayer's spouse in an activity as participation by the taxpayer for purposes of Sec. 469 and its regulations without regard to whether the spouses file a joint return. However, the scope of attribution of a spouse's activity with regard to satisfying the two requirements to be a real estate professional is limited in Regs. Sec. 1.469-9(c)(4), which provides:

Spouses filing a joint return are qualifying taxpayers only if one spouse separately satisfies both requirements of section 469(c)(7)(B). In determining the real property trades or businesses in which a married taxpayer materially participates (but not for any other purpose under this paragraph (c)), work performed by the taxpayer's spouse in a trade or business is treated as work performed by the taxpayer under § 1.469-5T(f)(3), regardless of whether the spouses file a joint return for the year.

According to the Tax Court, the parenthetical "(but not for any other purpose under this paragraph (c))" limits the use of spousal attribution to satisfying the material participation requirement for being a real estate professional. Thus, Temp. Regs. Sec. 1.469-5T(f)(3) and Regs. Sec. 1.469-9(c)(4) do not allow spousal attribution for purposes of meeting the second requirement that a taxpayer perform more than one-half of his or her personal services and more than 750 hours in real estate trades or businesses.

The Tax Court also discussed the IRS's argument that Oderio, having not filed a joint return, was required to separately satisfy the real estate professional requirements herself based on the flush language of Sec. 469(c)(7)(B), which generally states that a taxpayer must separately satisfy the requirements and only provides an exception to this general rule "[i]n the case of a joint return." The Tax Court agreed with the IRS, citing two canons of construction in support of its conclusion.

The court first cited the canon that if a statute provides specific exceptions to a general rule, it may be inferred that Congress intended to exclude any further exceptions in the absence of contrary legislative intent. Oderio did not cite, and the court did not find, any contrary legislative intent, so the court found that the canon applied and inferred that the joint return exception was the only exception.

The second canon was that a statute should be construed so that no clause, sentence, or word is rendered superfluous, void, or insignificant. The court reasoned that if a married taxpayer satisfies the real estate professional requirements by virtue of his or her spouse's satisfying them regardless of whether they filed a joint return, then the words "[i]n the case of a joint return" would not limit, modify, or otherwise perform any function in the statute. Therefore, Oderio's interpretation of the statute violated this canon.


Oderio tried to avoid an accuracy-related penalty for her underpayment by claiming that she relied on her tax preparer's advice, but she presented no evidence for her claim, so the Tax Court upheld the IRS's assessment of the penalty. To protect themselves, practitioners should inform clients who are claiming to be real estate professionals exactly what the requirements are to be one and the evidence of their activities that will be necessary to prove that they meet the requirements if the IRS examines their returns.

Oderio, T.C. Memo. 2014-39

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