b"Assembly Bill continued from page 36Rental Income continued from page 35explicitly does not qualify as real property trade or businessinvestors, proving material participation is an uphill battle when activity are those services performed by an individual in theirtheir real estate activities are located out of state or if they employ capacity as an investor4.The Treasury Regulations under IRC a management company to manage the day-to-day operations. 469 specifically list work performed by an individual as an investorIn two Tax Court cases (Madler & Keonig7) the court held the to include (1) studying and reviewing financial statements ortaxpayers failed to show they and not the management company reports on operations of the activity, (2) preparing or compilingthey hired materially participated. summaries or analyses of the finances or operations of the activity for the individuals own use, and (3) monitoring the finances orTo determine if there is material participation the Treas. Reg. operations of the activity in a non-managerial capacity5.Also,1.469-5T (a) has created seven tests.Fortunately, the taxpayer personal services performed as an employee in a real propertymust only meet one of the tests.The first of these tests is if the trade or business will not qualify unless the taxpayer is a greaterindividual participates in the activity for more than 500 hours than 5% owner in the activity.Its important when quantifyingduring the year8.If you compare the hours requirement of the the time spent in a real property trade or business that a taxpayermaterial participation and the hours requirement for real estate account for the time that meets the criteria.If time associatedprofessionalthe real estate professional requirement of 750 hours with being an investor is included in the taxpayers analysis ofwould, therefore, meet the criteria for material participation.The meeting the criteria for non-passive treatment, there could beconfusing part of these two subsections is, if a taxpayer meets an adjustment under examination.the material participation test but does not meet the real estate professional test then the real estate activity is considered passive. Its possible to have one spouse qualify as a real estate professionalThis can happen if the taxpayer spends less than 50% of their time when the other spouse is a full-time professional in a differentin a real property trade or business.Without getting too far off-occupation.In the case of Birdsong6, the taxpayers were atopic this article does not touch on the $25,000 special allowance married couple where one spouse was a full-time emergencyfor rental real estate with an Adjusted Gross Income limitation of room physician and the other spouse maintained the couples$150,000.This allowance has a standard of active participation9 rental properties.Mrs. Birdsong's duties included the day-to-day management of their rental properties.The court did notcontinued on page 37specifically address ownership issues in community property states compared to separate property states.In this case, the taxpayers were residents of California, a community property state.The significance of this case is only one spouse needs to meet the two criteria to treat a real estate trade or business as non-passive.This article isnt drawing any conclusions on what activities or services the taxpayer must perform to qualify for the real estate professional status, however, it should be noted that each task should be analyzed to determine whether it meets the criteria detailed in the tax code and regulations.The point to be made is that contemporaneous logs and details need to be maintained by the taxpayer.These logs should note the date, time spent, and the tasks performed by the taxpayer to document the activity necessary to meet the criteria to qualify as a real estate professional. Material ParticipationQualifying as a real estate professional doesnt mean that all losses from rental properties are automatically deductible against non-passive income. After the taxpayer qualifies as a real estate professional, the taxpayer must then meet the material participation tests for the rental properties to be able to deduct the losses against non-passive income.The tax code section 469(c) is specific to real estate.The general purpose of the material participation rules is to limit losses of taxpayers who are merely investors.Specifically, for real estate Page 36Fall 2019Points of Interest"