By David Kirk, CPA, J.D., LL.M. January 1, 2018

The Tax Court recently held that a mortgage broker was not a real estate professional and therefore was subject to the passive activity loss rules of Sec. 469 (Hickam, T.C. Summ. 2017-66).

During the years at issue, Kurt Hickam brokered real estate mortgages and other loans secured by real estate, both as an independent contractor and as an employee. Hickam was a licensed real estate agent, but he did not operate, develop, redevelop, construct, reconstruct, or rent real estate in brokering mortgages or originating loans. He did, however, manage and maintain various properties owned by himself and family members. Services that Hickam provided for the properties included placing ads, processing applications, inspecting conditions, and overseeing repairs and remodels. He received $6,000 annually for these services but did not keep contemporaneous records of the hours spent.

On his 2011 and 2012 tax returns, Hickam claimed rental real estate loss deductions for the properties. Upon audit, the IRS disagreed and determined that the passive activity loss rules applied, as Hickam was not a real estate professional. He argued to the court that his mortgage brokerage services and his loan origination services should be included for purposes of satisfying the real estate professional test. Additionally, he prepared a noncontemporaneous calendar for each month reflecting time spent on property management, mortgage brokerage services, and loan origination services. More...