IRS Cracks Down on Real Estate Professionals

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We’re back! After a few long months of planning, developing, bugging, debugging and debugging some more, I’m pleased to welcome you all to TaxLoopholes 3.0. Feel free to explore!

I’ve been doing a lot of strategies lately and that’s put me in frequent contact with the DKAffiliated members. It’s been fun to connect and “talk shop” with other motivated and creative tax professionals, and we’ve exchanged some great ideas. Something that almost all of us have noticed is the increased IRS scrutiny of real estate professionals. Becoming a real estate professional has long been one of my favorite strategies for real estate investors because of the ability to take unlimited real estate losses against their income. Without the Real Estate Professional status losses are limited to just $25,000 per year. To become a Real Estate Professional though, you need to pass some tests, including a time requirement. You’ve got to spend more time doing real estate activities than anything else, and you’ve got to spend at least 750 hours per year on real estate. I always recommend to people who want to claim Real Estate Professional status that they keep a good time log of their weekly activities, and that it needs to be accurate. My DKAffiliated colleagues agree on that point – the time diary is something the IRS is taking a long, hard look at. And a recent Tax Court case I came across today confirmed it. In this case, the taxpayer provided a calendar that established the dates she had carried out real estate activities, but only estimated the amount of time she spent on her rental properties. With nothing more than her estimates to go on, the court found that she had spent only 759 hours performing personal service in connection with her rental real estate business, while she spent at least 780 hours performing personal service as an employee in another trade or business. By not being able to prove she had spent more time on real estate activities than anything else, the taxpayer lost her status and the unlimited paper loss for that year.

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