Court addresses participation time for real estate professional

Court disallows professional development time when measuring hours


Authored by RSM US LLP

A U.S. district court case (Brendan G. Johnson et ux. v. United States; No. 2:19-cv-00674) recently addressed whether hours spent on certain professional development activities could be considered when determining whether a taxpayer was a real estate professional. The court ultimately concluded that time the taxpayer spent studying for the California real estate exam did not pertain to the operations or day-to-day management of her real estate activities, and hence she could not include those hours when determining whether she met the 750-hour threshold to be classified as a real estate professional. As a consequence, losses from those activities were disallowed.


Taxpayers who incur losses from trade or business activities must navigate complex rules to determine whether the loss is from a passive activity; if it is, those losses are subject to limitations on their use. This analysis generally focuses on quantifying the hours the taxpayer has spent on the activity in the year of loss, and comparing those hours to certain thresholds to determine whether a loss will be limited. For most taxpayers, spending more than 500 hours of time in the activity is sufficient to avoid loss limitations. For taxpayers involved in rental real estate activities, the threshold is generally 750 hours.

Regulatory guidance indicates that, but for two exceptions, all time that a taxpayer spends in connection with a trade or business is considered when determining whether the hour threshold has been satisfied. The two exceptions are:

  1. Time that is spent on activities not customarily done by an owner where a principal purpose of performing the work is to avoid the loss disallowance rules, and
  2. Time spent on ‘investor activities’, unless the taxpayer is directly involved in the day-to-day management or operations of the activity. 

The Case and Analysis

Mrs. Johnson and her husband owned several rental properties in California and Nevada. After various stipulations, the case ultimately centered on whether Mrs. Johnson performed more than 750 hours of services during the relevant tax year with respect to those properties. She claimed that she did, and in so doing argued that 87.5 hours spent studying for the California real estate exam should be included when quantifying her services. 

The district court disagreed. In its decision, the court suggested that the tax court has generally disallowed educational activities when evaluating an individual’s status as a real estate professional. It also highlighted what it viewed as an inconsistency in the taxpayer’s argument – arguing on one hand that licensure was not necessary to qualify as a real estate professional, while also arguing that time spent studying for that licensure should be considered. The court concluded, “Because licensure has no bearing on Mrs. Johnson’s status as a professional, this court finds that time she spends studying for licensure also has no bearing.”


This case is interesting because taxpayers often wrestle with this issue – deciding which activities they can consider when measuring their participation for purposes of the passive activity rules. The general rule is that all time counts, except for the two categories noted above. That makes the court’s decision here somewhat confusing. In its decision, the court cites several cases that themselves more explicitly address whether a taxpayer’s time constitutes ‘investor hours.’ Yet in this case, the district court never explicitly indicates that professional development time should be disallowed because it fits in that category. 

For that reason, taxpayers might reach a different conclusion when deciding whether professional development time should count toward satisfying the relevant participation threshold. However, those who do should be aware of this decision and be prepared to either argue that the case was wrongly decided or that their facts differ from those in the case.