Taxpayers that own rental real estate property will often
want to qualify as “real estate professionals” under Section 469 (the “passive
loss rules”). If they do that, their losses from their real estate activities can
be used to offset other income beyond the $25,000 that is allowed – otherwise,
they can only apply those losses against passive activity income.
Normally, a taxpayer will need to show that he or she spent
at least 750 hours in the year on rental activities to qualify as a real estate
professional for this purpose. However, there is a second requirement that must
be met, which will make the real estate professional label difficult to obtain
for taxpayers who also work other jobs, as demonstrated in a recent Tax Court
case.
In Hassanipour, T.C. Memo 2013-88, Mr. Hassanipour
owned 28 rental units in California. With that number of units, it should have
been easy to show the 750 hours requirement was met. However, the passive loss
rules also require that more than one-half of the personal services performed
in trades or businesses by the taxpayer during the year are performed in real
property trades or businesses in which the taxpayer materially participates.
Since Mr. Hassanipour also worked a full time job outside of the real estate
professional, he thus would have also had to show that he worked more than the
1500-1600 hours or so that he worked at his other job. This obviously is a much
higher burden, and Mr. Hassanipour was unable to satisfy the court that he
worked that level of time in both his regular job and in his real estate
business. This burden will also make it difficult for others working full-time
jobs to qualify as real estate professionals.
Taxpayers who can meet the hours requirements should keep
contemporaneous time records to be able to prove it if questioned. Further,
unlike Mr. Hassanipour, they should NOT present to the court evidence of
contemporaneous time records on a paper calendar that bears a copyright date on
it that is AFTER the years it was supposedly being used to track.
Hassanipour,
T.C. Memo 2013-88
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