Tax Court Case favors the IRS-Taxpayer did not meet real estate professional 750-hour requirement

If you are claiming to be a Real Estate Professional here is another case that points out that taxpayers needs to be documenting their time when performing real estate activities. A recent tax court case held against the taxpayer claiming that he did not qualify as a real estate professional. The Tax Court held that being “on-call” does not count towards the 750 hour requirement (Moss, 135 TC No 18).

SITUATION: The taxpayer was employed full time. The taxpayer and his wife owned a number of rental properties, including four apartments and three single-family homes. The taxpayer was directly involved in the rental properties performing rent collection, repairs/maintenance, and screening/evicting the tenants. For record keeping purposes the taxpayer kept a log detailing the dates he spent performing these activities. The taxpayer neglected to include the time spent but later was allowed to go back and prepare a time summary. The taxpayer’s total hours were 646 and did not meet the 750 hour test (as required to be a real estate professional). NOTE: Not to mention the fact that over 50% of his service must be in the real estate profession.

The taxpayer also argued that he was on-call during his employee time to handle rental issues. The Tax Court took the position that service time must be actual performance of such service. The tax court also rejected the taxpayer’s claim that his calendar reflected only 75% to 85% of his time- failure to provide proof.

CONCLUSION: The Tax Court ruled in favor the IRS and the taxpayer was subject to additional income taxes and accuracy-related penalties.

TAKE AWAY: Taxpayers claiming to be real estate professional need to keep detailed records of their time and services when working on their properties.

Greg Nelson, CPA, MBT

Olsen Thielen CPAs

www.otcpas.com/blog