Can a real estate investor that qualifies as a real estate professional have capital gain treatment on sale of residential real estate that was never rented out?

[austingiftco]

A  real estate investor owns 2 residential rentalS  and occasionally purchases a house or two to update and sale for a gain as investment.  For the year 2018 the following occurred: Net rental income from the 2 single family homes; sale of a single family house that was purchased in 2016 and updated; sale of a single family house that was purchased in 2018 and updated and sold in 2018. Taxpayer has material participation in all 4 activities.  About 20 hours per year on each of the 2 rentals, and over 750 hours on the 2 investment houses that were sold.  90% of investors time is spent on these real estate activities combined.  The time spent on investment houses consists of acquiring properties, analysis of markets/values on whether to rent or sale for best gain outcome, determining what updates to do engaging with contractors to perform cosmetic updates to the houses, checking on contractor progress, paying expenditures, engaging real estate brokers to list houses on the market for sale, etc. 

Seems like this person qualifies as a real estate professional because of the time spent on the activities combined.  Therefore, the rental real estate activity would qualify as non passive and for Sec.199A QBI deduction.  The only way they qualify as real estate professional is by taking into consideration the time spent on the other non-rental real estate activities because time spent on rental properties is minimal.

Can the sale of the 2 investment houses in 2018 be treated as capital gain (one long term and one short term), even though the time spent on these properties is material which I believe counts in determining real estate professional status?  I don't believe this person is as a real estate dealer because of the minimal number of properties and did not show any sales of property in 2017 and does not currently have any properties for sale, but is holding one property as investment currently.

Does this person qualify as a real estate professional (by including time spent on real property investments in addition to rental property time)? And should the rentals qualify for the Sec 199A QBI deduction?

If this person is a "real estate professional" for this year, can the gain on sale of the real property investments (that were never rented out) be treated as capital gains? 

[TaxMonkey · Accepted solution]

Real estate professional and QBI deduction are loosely - at best related.

The only reason you would be asking about a real estate professional is because their rental activities are at a loss and they would not otherwise be deductible.

So you want LTCG treatment for the "investment properties" while deducting ordinary losses of for the rental activities due to "real estate professional status" 

Sure, why not.  You probably wont get audited anyway.  Then if you were audited I'm sure you could explain how your real estate professional's investment in the other properties were not in fact a part of his professional real estate activities, but rather completely separate investment activities.

Mind if I ask who your E&O carries is?

[George4Tacks]

I thought I was the sarcastic socratic.