Real Estate Professional fails to qualify–doesn’t provide necessary documentation/support
Adeyemo, TC Memo. 2014-1
Tax Law Background
Rental losses are subject to the rules under IRC 469. These losses can be limited or suspended based on a taxpayer’s income and participation. There are exceptions to these rules for taxpayers that qualifying as Real Estate Professionals by satisfying the following:
- More than half of all the personal service hours that he performs during that year are performed in real property trade or businesses in which he materially participates; and
- He performs more than 750 hours of services during that tax year in real property trades or businesses in which he materially participates.
Situation
Facts: Mr. and Mrs. Adeyemos are a married couple who filed joint tax returns. The taxpayers owned seven rental properties which reported losses in 2008 and 2009. Mr. Adeyemos (Taxpayer) performed the majority of management duties for these properties for which they did not hire an outside management company. Mr. Adeyemos logged 800 hours for managing his rental activities in 2008. In addition to his management responsibilities, Mr. Adeyemos performed 1,500 hours of personal services as a pharmaceutical sales representative. The real estate hours were supported by a credible logbook however, 800 hours was less than half of all the personal service hours. The logbook also showed that Mr. Adeyemos logged 715 hours in real estate services in 2009, less than the required 750 hours. Mr. Adeyemos submitted supplementary spreadsheet that contained additional hours with more thorough records of duties performed that, if accepted, would qualify Mr. Adeyemos as a real estate professional.
Decision
The court ultimately ruled that the taxpayer had failed to provide consistent and verifiable evidence of hours worked. The court rejected the additional spreadsheet due to disorganized receipts and inconsistencies in testimonies by the taxpayer and spouse. The court believed that the spreadsheet reflected hours worked by both the taxpayer and spouse.
Conclusion
Taxpayers should keep consistent and detailed reports that accurately depict their involvement in rental activities. It is best to do this on a continuous basis because to do otherwise may be inadequate for the IRS, leading to an unfavorable outcome for taxpayers. Although spousal time can be counted for active participation it cannot be counted for the 750 hour real estate professional classification.
For more information about the services Olsen Thielen provides to the real estate industry, contact Greg Nelson, CPA, MBT and 952-941-9242 or visit our website.