Usually not on the strength of the mortgage work. Hours you spend brokering or originating loans don't count as real estate hours for real estate professional status (REPS), even when every loan is secured by real property. The IRS said so in Chief Counsel Advice 201504010, and the Tax Court reached the same answer in Hickam v. Commissioner, T.C. Summary Opinion 2017-66.

That doesn't close the door for every mortgage broker who owns rentals. It means the qualifying hours have to come from somewhere else, and they have to outweigh the loan work. This page covers why the loan hours don't count, why a California real estate license doesn't change the federal answer, and what still works.

For the full REPS framework, start with our REPS and passive losses page.

The quick refresh: what REPS needs

Under IRC §469(c)(7)(B), you are a real estate professional for a tax year only if you pass both tests:

  • More than half of the personal services you perform in all trades or businesses during the year are in real property trades or businesses in which you materially participate.
  • More than 750 hours of services in those real property trades or businesses.

On a joint return, one spouse has to pass both tests alone.

Section 469(c)(7)(C) defines a real property trade or business as "any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business." The whole mortgage broker question turns on the last word on that list.

Why mortgage hours don't count

What the IRS said

CCA 201504010 compared two people. One was a licensed real estate agent who brought buyers and sellers of property together. The other was a licensed mortgage broker who brought lenders and borrowers together. The IRS concluded the agent may be in a real property brokerage business. The mortgage broker is not, because a mortgage broker is "a broker of financial instruments."

The memo gave two reasons. First, earlier versions of the bill listed "finance operations" as a real property business, and Congress took that out before the law passed. Second, the ordinary meaning of real property brokerage is bringing together buyers and sellers of real property. Bringing lenders and borrowers together isn't that.

A Chief Counsel memo isn't precedent. It does show how IRS examiners read the statute.

What the Tax Court said

In Hickam, a California taxpayer brokered mortgages as an independent contractor branch manager and also originated loans as a W-2 employee. He was a licensed real estate agent too, though the record didn't show he worked as one. He also managed three rentals in San Jose and Capitola.

He argued his loan work was a real property "operation" or "brokerage" business because the loans were secured by real estate. The court disagreed on both points. The words "real property" modify every item on the statute's list. His work didn't involve operating the properties that secured the loans. And while mortgage brokerage is a brokerage business, it isn't a real property brokerage business, because he brokered loans, not real estate.

The court said its holding rested on the statute, not on the CCA. It is a summary opinion, so under IRC §7463(b) it can't be cited as precedent. It is still the clearest Tax Court answer on this exact question.

The hours made it worse

Mr. Hickam's own reconstructed logs showed 1,583 hours of mortgage work and 836 hours on the rentals for 2011. Once the mortgage hours are non-qualifying, that split can't pass the more-than-half test. The court didn't accept the logs anyway. They were built after the audit started, with vague entries and estimated time.

That is the real trap for a working mortgage broker. The loan hours don't just fail to help. They go into the denominator of the more-than-half test and push the bar higher.

Does a California real estate license change this?

No. In California, a lot of mortgage brokers hold a Department of Real Estate license. Business and Professions Code §10131(d) defines a "real estate broker" to include someone who solicits borrowers or lenders for, or negotiates, loans secured by real property. So under state licensing law, loan brokering is real estate broker work.

Federal tax law doesn't follow that label. The CCA says state law definitions of "real estate agent" and "mortgage broker" aren't determinative for §469. In the CCA's own facts, state law treated the mortgage business as real property brokerage, and the IRS still said it didn't count.

What matters is what you actually did with your hours. If you hold one DRE license and do both kinds of work, keep them apart in your log. Hours spent listing and selling property for clients can count as real property brokerage. Hours spent on loan files don't. See do real estate agents qualify for REPS for how agent hours are tested.

Loan officers on W-2

If you originate loans as an employee, a second rule applies. Under §469(c)(7)(D)(ii), personal services performed as an employee don't count as real property hours at all, unless you are a more-than-5% owner of the employer.

For a loan officer, owning part of the mortgage company doesn't fix anything, because the business isn't a real property trade or business in the first place. Those W-2 hours still count in the total for the more-than-half test. A full-time W-2 job of 2,000 hours means you'd need more than 2,000 hours of real estate work on top of it.

Paths that still work

1. Real estate hours that outweigh the loan work

You can still qualify if your hours in listed real property businesses pass 750 and are more than your mortgage hours plus any other work. That can happen for a broker who closes a modest number of loans and spends most of the year on things like:

  • Managing your own rentals, if you materially participate.
  • Property management for other owners.
  • Development, construction, or renovation done as a business.
  • Selling property as an agent or broker.

This is realistic mainly for part-time brokers or people winding down a loan business. If you work 1,500 hours on loans, you need more than 1,500 hours of qualifying real estate work in the same year. Count honestly. See what counts toward real estate professional hours.

2. A spouse who qualifies alone

If your spouse works full time in real estate and passes both tests on their own, your joint return can use REPS. Your mortgage hours don't matter for your spouse's tests.

Your hours on the rentals still help. Under §469(h)(5), a spouse's participation counts when testing material participation in a rental. So the qualifying spouse's hours and yours on the properties can combine for that test. See spousal real estate professional status.

3. Material participation still has to be there

Passing REPS only removes the automatic passive label on your rentals. Each rental, or the group if you make the election under Treas. Reg. §1.469-9(g), still needs material participation under one of the seven tests in Temp. Treas. Reg. §1.469-5T(a). Mr. Hickam had made the grouping election, and it didn't help, because the hours weren't proven. See how to make the REPS grouping election.

4. If REPS is out

A few other options apply to mortgage brokers the same as anyone else:

  • Short-term rentals. Under Temp. Treas. Reg. §1.469-1T(e)(3)(ii)(A), an activity with an average customer stay of seven days or less isn't a rental activity for the passive rules. If you materially participate, losses can be nonpassive without REPS. See REPS vs the short-term rental exception.
  • The $25,000 allowance. Active participation can let you deduct up to $25,000 of rental losses, but it phases out between $100,000 and $150,000 of modified AGI under §469(i)(3). Most full-time brokers are past it. See material participation vs active participation.
  • Suspended losses aren't lost. They carry forward and are released when you sell the property in a fully taxable sale to an unrelated buyer. See suspended passive losses when you sell.

Your rental income is also likely to be net investment income for the 3.8% tax if you aren't a real estate professional. See real estate professional status and the NIIT.

California is a separate answer

Even a broker who passes REPS federally gets no REPS treatment from California. The FTB's Form 3801 instructions say California didn't conform to §469(c)(7), and rental activities are passive for California purposes. A loss that offsets income on your federal return can stay suspended on your California return. See California real estate professional status and FTB 3801.

What to keep if you're going to try

  • A log with separate lines for loan work and real estate work, kept as you go. Date, task, property or client, and time.
  • Your total hours for every job and business, not just the real estate ones.
  • For dual-license work, the sale files or listings that back up the real estate side.
  • For rentals, the records that show who did the work: you, your spouse, or a property manager.

The log method is in how to keep a REPS time log that holds up. Hickam is a good example of what doesn't hold up: a log rebuilt after the audit, from estimates.

Frequently asked questions

Is a mortgage broker considered a real estate professional by the IRS?

Not because of the mortgage work. In CCA 201504010, the IRS concluded a mortgage broker who brokers financial instruments isn't in a real property brokerage trade or business under IRC §469(c)(7)(C). The Tax Court reached the same result in Hickam v. Commissioner, T.C. Summary Opinion 2017-66. A mortgage broker can still qualify through other real estate hours that pass both REPS tests.

Do loan officer hours count toward the 750-hour test?

No. Loan origination isn't a real property trade or business, according to the Tax Court in Hickam. If you're a W-2 loan officer, IRC §469(c)(7)(D)(ii) also excludes employee hours unless you own more than 5% of the employer. Those hours still count in your total for the more-than-half test.

I have a California DRE broker license. Doesn't that make me a real estate broker?

For licensing, yes. California Business and Professions Code §10131(d) includes loan brokering in the definition of a real estate broker. For federal tax, no. The IRS said in CCA 201504010 that state law labels don't decide the §469 question. Hours spent selling or listing property can count. Hours spent on loans don't.

Can my spouse qualify for REPS if I'm a mortgage broker?

Yes, if your spouse passes both REPS tests alone with their own hours. On a joint return, one spouse has to meet both the more-than-750-hour test and the more-than-half test separately. Your hours on the rentals can still count toward material participation under IRC §469(h)(5).

Can a part-time mortgage broker qualify for real estate professional status?

Possibly. You need more than 750 hours in real property trades or businesses, and those hours have to be more than half of all your working hours, including the mortgage work. A broker who works 1,500 hours on loans would need more than 1,500 hours of qualifying real estate work that year. You also need to materially participate in the rentals.

Does California recognize real estate professional status for mortgage brokers?

No. California doesn't recognize REPS for anyone. The FTB's Form 3801 instructions say California didn't conform to IRC §469(c)(7) and that rental activities are passive for California purposes.

Talk it through with us

Bring a rough split of your year: loan hours, real estate hours, and any other work, for you and your spouse. Add your rental list and who manages each property. We'll tell you whether REPS is realistic, which spouse it would run through, and what to do instead if it isn't. Book a new client introduction.

LaviCPA is a Los Angeles CPA firm for real estate investors. Shawn Lavi, CPA, is the firm's principal. Elias Lavi, CPA, is its founder and co-owner.