Facts:
Larry and Marcia Ricci are a married couple living in Californiawho file a joint tax return. For the past
several years, Larry worked full time as a CPA. This year, Larryspent 2,250 hours working in his CPA
position.
In addition to being a homemaker, Marcia worked part-time as areal estate agent at Brokerage Firm.
Although Marcia was licensed as a real estate agent applicablestate law; she was not a licensed as a
broker. Marcia worked for Brokerage under a contract statingthat she was an independent contractor,
not an employee of the brokerage firm. Consistent with Marciaâsindependent contractor status, the
Brokerage issued a Form 1099 to her. Brokerage did not pay her asalary; rather, she received
commissions. The contract also required Marcia to sell,exchange, lease, or rent properties and solicit
additional listings, clients, and customers diligently and withher best efforts. Marcia spent a total of
1,000 hours selling real estate this year.
During this year, Larry and Marcia owned two apartment rentalproperties. In addition to his
employment as a CPA, Larry spent approximately 80 hours managingProperty 1. Property 1 had a
resident who assisted Larry and the resident spent 100 hoursthis year managing it.
Marcia spent approximately 430 hours managing the Property 2during this year. She was the only
person who managed this property.
This year, Larryâs CPA salary is $300,000. Marcia will have realestate commissions from Brokerage of
$80,000 and related expenses of $25,000. Her Schedule C for herreal estate agent activity will, thus,
show net income of $55,000.
Property 1 collected $60,000 of rental income, but had $80,000of expense, for a net $20,000 loss.
Property 2 collected $75,000 of rental income, but had $90,000of expense for a net $15,000 loss.
The Riccis are concerned about whether the passive activity lossrules of Code section 469 may apply to
limit their ability to deduct losses related to theProperties.
Issues:
1) To what extent, if any, are the losses related to theProperties deductible this year?
Facts:
Larry and Marcia Ricci are a married couple living in Californiawho file a joint tax return. For the past
several years, Larry worked full time as a CPA. This year, Larryspent 2,250 hours working in his CPA
position.
In addition to being a homemaker, Marcia worked part-time as areal estate agent at Brokerage Firm.
Although Marcia was licensed as a real estate agent applicablestate law; she was not a licensed as a
broker. Marcia worked for Brokerage under a contract statingthat she was an independent contractor,
not an employee of the brokerage firm. Consistent with Marciaâsindependent contractor status, the
Brokerage issued a Form 1099 to her. Brokerage did not pay her asalary; rather, she received
commissions. The contract also required Marcia to sell,exchange, lease, or rent properties and solicit
additional listings, clients, and customers diligently and withher best efforts. Marcia spent a total of
1,000 hours selling real estate this year.
During this year, Larry and Marcia owned two apartment rentalproperties. In addition to his
employment as a CPA, Larry spent approximately 80 hours managingProperty 1. Property 1 had a
resident who assisted Larry and the resident spent 100 hoursthis year managing it.
Marcia spent approximately 430 hours managing the Property 2during this year. She was the only
person who managed this property.
This year, Larryâs CPA salary is $300,000. Marcia will have realestate commissions from Brokerage of
$80,000 and related expenses of $25,000. Her Schedule C for herreal estate agent activity will, thus,
show net income of $55,000.
Property 1 collected $60,000 of rental income, but had $80,000of expense, for a net $20,000 loss.
Property 2 collected $75,000 of rental income, but had $90,000of expense for a net $15,000 loss.
The Riccis are concerned about whether the passive activity lossrules of Code section 469 may apply to
limit their ability to deduct losses related to theProperties.
Issues:
1) To what extent, if any, are the losses related to theProperties deductible this year?
