Running rental real estate is a hands-on business; notwithstanding Section 469(c)(2), which shoehorns all rental real estate into passivity, anyone other than a pure investor, who hands all operational control to a manager, is finding tenants, collecting rents, making repairs or contracting for them (and riding herd on contractors), dealing with governmental and quasi-governmental authorities having or asserting jurisdiction, vendors, and utility providers, and getting entangled in the legal system.

Since a lot of rental real estate is Mom-and-Pop, a key to establishing an active deduction from a compulsorily passive business is showing material participation, like doing all of the above for at least 100 hours per tax year, and doing more than anybody else.

Judge Morrison has the story in an off-the-bencher, Krishan K. Gossain & Kavita Gossain, Docket No. 21812-22, filed 1/16/24. Krish claims pro status, but his 9-to-5 gig gives him too many non-real estate hours.

He does hit the 100 hour cutoff for the Section 469(i)(1) $25K special real estate allowance, and doesn’t fall foul of the $100K AGI disallowance barrier.

Best of all, Kav’s hours count too.

“Section 469(h)(5) provides that in determining whether a taxpayer materially participates in an activity, the participation of the spouse of the taxpayer is taken into account. A regulation elaborates that, in the case of any married individual, any participation by such person’s spouse in the activity during the taxable year (even if the spouse does not own an interest in the activity and even if the spouses do not file a joint return) is treated as participation by such person in the activity during the taxable year. Treas. Reg. § l.469-5T(f)(3).” Transcript, at pp. 9-10.

But Krish is on his own for pro status, which he must attain to break the $25K barrier which separates the professionals from the also-rans.

“The hours he worked on the rental properties include only the hour [sic] he personally worked on the rental property, not the hours Mrs. Gossain worked on the rental properties. §469(c)(7)(B) (first flush sentence).” Transcript, at pp. 12-13.