Are you a real estate professional or a real estate investor?
Who cares? It seems IRS does! Wall Street Journal had this recent story about how some real estate professionals, who also are real estate investors, are being scrutinized. The distinction is important for IRS, because full-time real-estate professionals, defined as someone who spends more than half of his working hours in real estate and more than 750 hours a year tending to real-estate activities, can fully deduct losses -- including depreciation, interest expense on loans and property taxes. But those who don't fit into that category are typically considered to be "passive" real-estate investors with a limited ability to deduct their losses.
And that is where the problem comes in. During early 2000s, when the real estate values were rising about $100K per year, a lot of part-time real estate investors also became real estate professionals and vice-versa. The idea was - if I am going to be buying or selling $500K average property, then each transaction will at least save me $15K (3% seller side commission). The same applied to a real estate investor representing buyer as real estate agent. If the buyer did not buy the property and it was good deal, the real estate professional could buy that as investor. So, moving around with buyer solved two things for these professionals, one give them tax credit for their efforts as real estate professional and second give them the opportunity to preview homes as investments. Imagine conflict of interest! And the buyers did not care who the listing agent was!
It seems IRS did care.