It looks like the IRS is ramping up their targeted audits of real estate professionals and real estate investors. The term “Real Estate Professional” (REP), when used by the IRS, has to do with whether you can take advantage of real estate losses against other income on your return. It’s been a popular loophole for real estate investors over the past few years. Here’s how it works:

If you have real estate losses, you can only take $25,000 of the loss against your other income if you make less than $100,000. If you make more than $150,000, you can’t take any of the loss. That’s where the Real Estate Professional status comes in. With this status, you can take all of your losses against your income, no matter how much the loss is and no matter how much your income is.

Now here’s the bad news. The IRS is no longer the kinder, gentler IRS. We have the 3rd new Commissioner in as many years and I’m afraid he wants to make his mark with collection revenue.

(1) Real Estate Agents denied the Real Estate Professional status because they are not brokers,

(2) Hours spent looking at property not allowed because this is considered an “investment”,

(3) Tax preparer misses an important election and there is no going back for taxpayer, and

(4) LLC Operating Agreement misses key phrases and is used against the real estate investor. End result: $50,000 in taxes, interest and penalties!

The IRS is targeting Real Estate Professionals. The timing couldn’t be worse. At a time of dropping home values, tightened credit and a general malaise in the housing market, an aggressive IRS audit specifically targeting the people who are suffering the most in this economic time can’t be good for anyone. But the IRS has their job too and that’s to raise tax revenue.