December 3, 2014
A married couple was not allowed deductions for losses from rental real estate activities for tax years 2007 and 2008 in a 2014 Tax Court decision.
The taxpayers’ position was that they were entitled to deduct the losses because the husband qualified as a real estate professional under a section of the Internal Revenue Code (IRC). Real estate professionals are allowed to deduct passive losses. Regular taxpayers are not.
The IRS position was that the husband did not qualify as a real estate professional.
A “real estate professional” is defined in IRC Section 469 (c) (7) (B) by means of a two-part test:
- More than one-half of the personal services performed in trades and businesses by the taxpayer during a taxable 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 taxable year in real property trades or businesses in which the taxpayer materially participates.
The burden of proving whether they are entitled to a deduction falls on the taxpayers.
Howard Cantor has owned ABC Glass as a sole proprietorship since 1991. He started out providing automobile parts, but by 1995, his business had evolved into providing auto glass and glass services for residential buildings.
Cantor even had his 1,500-square-foot office facility divided into separate sections for the automotive division and the residential division.
The facts and circumstances indicate that Cantor spent more of his time working in the residential division. In fact, nobody questioned the fact that he had provided more than 750 hours of service in the residential division. Thus he met Part 2 of the Internal Revenue Code’s real estate professional test.
Unfortunately, Cantor did not keep a contemporaneous log showing how much time was spent in the auto glass activity and how much time was spent in the residential activity.
No evidence submitted by Cantor, including his testimony, allowed the court to determine how much time he had spent providing services for the two different divisions of the business.
Because Cantor was unable to prove that he had spent more time in the residential division of his business than he did in the automotive division, he was unable to meet Part 1 of the IRC test for qualifying as a real estate professional.
The burden of proof was on him, and he was unable to meet it. Therefore, Cantor was denied treatment as a real estate professional, and his passive losses for 2007 and 2008 were denied (Howard C. Cantor and Patricia M. Allen v. Commissioner, U.S. Tax Court, T.C. Summary Opinion 2014-103).
This article was originally posted on December 3, 2014 and the information may no longer be current. For questions, please contact GRF CPAs & Advisors at marketing@grfcpa.com.