Larry and Marcia Ricci are a married couple living in California who file a joint tax return. For the past

several years, Larry worked full time as a CPA. This year, Larry spent 2,250 hours working in his CPA

position.

In addition to being a homemaker, Marcia worked part-time as a real estate agent at Brokerage Firm.

Although Marcia was licensed as a real estate agent applicable state law; she was not a licensed as a

broker. Marcia worked for Brokerage under a contract stating that she was an independent contractor,

not an employee of the brokerage firm. Consistent with Marcias independent contractor status, the

Brokerage issued a Form 1099 to her. Brokerage did not pay her a salary; 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 with her best efforts. Marcia spent a total of

1,000 hours selling real estate this year.

During this year, Larry and Marcia owned two apartment rental properties. In addition to his

employment as a CPA, Larry spent approximately 80 hours managing Property 1. Property 1 had a

resident who assisted Larry and the resident spent 100 hours this year managing it.

Marcia spent approximately 430 hours managing the Property 2 during this year. She was the only

person who managed this property.

This year, Larrys CPA salary is $300,000. Marcia will have real estate commissions from Brokerage of

$80,000 and related expenses of $25,000. Her Schedule C for her real estate agent activity will, thus,

show net income of $55,000.

Property 1 collected $60,000 of rental income, but had $80,000 of expense, for a net $20,000 loss.

Property 2 collected $75,000 of rental income, but had $90,000 of expense for a net $15,000 loss.

The Riccis are concerned about whether the passive activity loss rules of Code section 469 may apply to

limit their ability to deduct losses related to the Properties.

Issues:

1) What is the import of the real estate professional rules?