How a "Full-Time" Pilot Qualified as a Real Estate Professional

Real estate professional status allows landlords to deduct rental losses against their regular (W2, business, interest, dividends) income. It's a powerful tax strategy for real estate investors.

But one test to qualify as a REP is to spend more time in real estate than your day job.

So how did a boat pilot with a W-2 job qualify as a REP?

Here's the story (and there's an expensive surprise at the end):

Without REPS, rental losses are generally passive and can only be used to offset passive income... if there is no passive income, the losses are suspended and carried forward.

To qualify as a REP, you must spend 750 hours working in real estate AND more time working in real estate than any other activity. You must also "materially participate."

The problem with REP status is the second test: work more in real estate than anywhere else.

It automatically blocks anyone with a full-time job or business role from qualifying.

But how did a boat pilot qualify as a REP?

Tom Miller owned 7 rental properties with his wife. Tom worked as a commercial seagoing pilot for the San Fran Bar Pilots Association. He would meet large container, cruise, and military ships 13 miles out at sea and pilot them through the San Fran channel.

His schedule was seven days on, seven days off. But he was generally not required to work all of his "on" days and his schedule was very predictable.

This enabled Tom to invest in rentals and self-manage them to such an extent that he spent more time on his rentals than he did piloting ships. Tom and his wife performed most maintenance, repairs, and tenant management themselves. Witnesses in Tax Court called Tom's work ethic "extraordinary" and "one in a million."

The Tax Court found that Tom qualified as a real estate professional.

But there was a catch.

The Miller's never made the -9 election to group all rentals and treat as one passive activity. This is critical for material participation.

Without the grouping, a landlord must meet one of the seven material participation tests on EACH property they own.

Since the -9 election was never made, the Tax Court analyzed the Miller's participation in each rental separately and found they only materially participated in two of their rentals.

So even though Tom was a real estate professional, despite having a W2 job as a boat pilot, the Millers only had a partial win because they forgot the -9 election.

They owed back taxes of ~$60,000.

Tough pill to swallow.

Questions? The DBC Team is here to ensure your business adheres to tax protocol while optimizing your earnings. Contact us to learn more!

Source: Brandon Hall, CPA