In Zarrinnegar [2/13/17], a dentist’s case illustrates another aspect of the passive activity loss rules: Can a dentist also be a real estate professional and use the losses from his real estate business to offset his dental practice income? The taxpayer and his wife both were dentists who worked at their joint dental practice in shifts: she worked 9 - 2:30 Mondays, Wednesdays, Thursdays, and Fridays, and some Saturdays, and her husband worked 2:30 - 6:00 Mondays, Wednesdays, Thursdays, and Fridays. His real estate business consisted of his real estate brokerage activity and four rental properties that they owned and he managed. His wife did not participate in the real estate business. He spent hundreds of hours on brokerage-related activities (for example, brokers’ tours, listing searches, open houses, property viewings, and client meetings), and significant time managing the four rental properties. The taxpayers reported substantial income from their dental practice, and he reported losses from the real estate business that represented 47.4%, 63.3%, and 58.0% of the dental practice income for the three tax years, respectively, that were at issue in the case. The IRS disallowed the real estate business losses, contending they were passive activity losses, and not deductible. The Tax Court observed that generally rental activities are per se passive, regardless of how much the owner participates in the rental activity. But, the court noted the real estate professional rule excepts the taxpayer from the general rule if the taxpayer performs more than one-half of his personal services in a taxable year in a real property trade or business in which he materially participates, and he performs more than 750 hours during the year in real property trades or businesses in which he materially participates. Brokerage and rental real estate businesses are real property trades or businesses. For a joint return, the two requirements are met only if either spouse separately meets the two tests. As the husband’s wife did not participate in the real estate businesses, the court examined only the husband’s activities. The court first examined if the husband materially participated with respect to the rental properties and the brokerage business. It noted that regarding rental properties participation in each rental property must be examined unless the taxpayer makes the election to treat all interests in rental real estate as a single rental real estate activity, an election that the husband had not made. Then, for each rental, the court considered if the husband met any one of the seven tests that satisfy material participation. It concluded that the husband satisfied the test that provides for material participation if the individual’s participation constitutes substantially all of the participation in the activity of all individuals, including individuals who do not own interests in the activity. Secondly, the court examined if the husband met the two requirements under the real estate professional rule. It looked at the hours he spent in both his dental practice and his real estate business (brokerage and rental activities). It found his testimony credible that he worked at his dental practice on average 14 hours per week and, using 52 weeks a year if he worked every week, it arrived at 728 hours for his dental practice. For each of the three tax years, he produced logs that were prepared contemporaneously. He testified credibly and at great length about the logs’ contents, being able to recall extensive details relating to the log entries. Several other witnesses, including his wife, provided credible testimony that tended to corroborate the husband’s logs and testimony. The logs showed he spent more than 1,000 hours per year on real estate activities. Given the husband’s credible support for working more than 1,000 hours in real estate, and less than 1,000 hours in his dental practice, the Tax Court ruled he met the requirements for a real estate professional, and permitted the husband to deduct the losses from the real estate activities. For copy of the complete Tax Court decision, click below.