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meets two requirements: (1) He performs more than half of his
personal services during the year in real property trades or
businesses in which he materially participates; and (2) he works
more than 750 hours a year in those real estate activities. See
sec. 469(c)(7)(B). Personal services means any work performed by
an individual in connection with a trade or business. See sec.
1.469–9(b)(4), Income Tax Regs., T.D. 8645, 1996–1 C.B. 73, 76.
Services rendered by an employee, however, do not count as per-
formed in a real property trade or business unless the employee
is a 5-percent owner of the employer.3 See sec. 469(c)(7)(D)(ii)
(adopting the definition of a “5–percent owner” under sec.
416(i)(1)(B)). A couple who files jointly qualifies for the
exception under section 469(c)(7) only if either spouse sepa-
rately satisfies both requirements. See sec. 469(c)(7)(B) (flush
language). In determining material participation, however, the
participation of both spouses is combined. See sec. 469(h)(5).
Respondent concedes that petitioner meets the second
requirement of section 469(c)(7)(B)(ii); i.e., the 750–hour rule.
3A real property trade or business is defined broadly as
“any real property development, redevelopment, construction,
reconstruction, acquisition, conversion, rental, operation,
management, leasing, or brokerage trade or business.” Sec.
469(c)(7)(C).
Under sec. 1.469–5(f)(1), Income Tax Regs., an employee who
owns an interest in an activity is treated as participating in
that activity without regard to the capacity in which he works.
See also sec. 1.469–5T(k), Example (2), Temporary Income Tax
Regs., 53 Fed. Reg. 5686, 5727 (Feb. 25, 1988).
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