At Lefstein-Suchoff CPA & Associates, LLC we assist those faced with various tax problems, such as IRS problems including IRS Audits. To do so, we keep up to date with recent Court decisions and IRS Rulings. In our last post and our next two posts we will share some of these with you.
The U.S. Court of Appeals for the Eleventh Circuit has found that a taxpayer’s losses from real estate activities were passive losses because the taxpayer failed to prove he was a real estate professional (Harnett v. Commissioner, CA-11, 2012-2 ustc ¶50,665). The individual’s testimony lacked credibility, and he failed to produce other evidence to support his contention that he had personally performed many of the tasks necessary to maintain, rent, or sell the properties at issue.
Rental activities are generally passive activities. There is an exception, however, for the rental activities of taxpayers in real property trades or businesses. Under Code Sec. 469(c)(7)(B), a taxpayer is a real estate professional if more than one-half of the personal services performed in trades or businesses by the taxpayer during the tax year are performed in real property trades or businesses in which the taxpayer materially participates, and the taxpayer performs more than 750 hours of services during the tax year in real property trades or businesses in which the taxpayer materially participates.
The taxpayer owned numerous properties that he rented out over the years. During the three years at issue, the taxpayer claimed losses in connection with many of those properties. The taxpayer claimed that he spent approximately 1,200 to 1,500 hours each year performing services for properties that he owned either directly or through an S corporation he controlled. The IRS classified the losses as passive activity losses because the taxpayer did not meet the Code Sec. 469(c)(7)(B)(ii) requirement that he perform more than 750 hours per year of services in a real property business in which he materially participated, which would cause him to be considered a real estate professional.
The Tax Court similarly found that the taxpayer was unable to demonstrate that he had, in fact, performed services in connection with his properties to the extent that he claimed. His testimony lacked credibility, and he failed to produce other evidence supporting his contention that he had personally performed many of the tasks necessary to maintain, rent, or sell the properties at issue.
His age, poor health, and station in life made it unlikely that the taxpayer would personally perform such services. Further, the taxpayer also had extensive duties at a bank, which must have occupied much of his time. Moreover, the court found that, during the tax years at issue, the taxpayer was no longer renting the properties and was seeking to sell them because he was in poor health and had many duties at the bank.
On appeal, the Eleventh Circuit agreed with the Tax Court that the taxpayer had failed to show he performed more than 750 hours of service during the years in dispute. Some of the taxpayer’s evidence was more helpful in showing whether the taxpayer worked more at a bank than on the properties he owned. Therefore, the losses deducted by the taxpayer were passive activity losses, and could not be used to offset non-passive activity income.
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