Tim’s Tax News on the Tenth - March 2017

COURT SIDES with INDUSTRIOUS DENTIST and AGAINST IRS REGARDING RENTAL LOSSES

In a recent Tax Court case (Zarrinnegar v. Commissioner, T.C. Memo. 2017-34), the Court found that a dentist was also actively involved as a real estate professional to qualify the taxpayer to claim losses from his rental activities, which would normally be classified as a passive activity.

The taxpayer was a dentist married to another dentist with whom he shared a dental practice. The two worked in staggered shifts, thus allowing the husband time to devote to his other business. The couple also owned a real estate brokerage firm and four rental properties in which the husband managed the properties. The husband reported that he spent over 1,000 hours every year on the real estate business performing brokerage-related activities, such as brokers’ tours, listing searches, open houses, property viewings, and client meetings. In addition, he spent considerable time each year managing the couple’s four rental properties.

The taxpayers, on their Schedules E, reported losses from their real estate business of $221,582 for 2010, $242,276 for 2011, and $220,788 for 2012 to which the IRS objected, claiming they were passive activities and, therefore, had to be carried over to offset future passive income.

The Tax Court agreed with the IRS that, as a general rule, rental activities are per se passive, whether or not the taxpayer materially participates (Section 469(c)(2). As an exception, however, rental activities of taxpayers in real property trades or businesses are not treated as passive if the material participation requirement (750 hours of service) is satisfied. In the instant case, the taxpayer testified he contemporaneously prepared logs concerning his activities related to the real estate business. Therefore, the court concluded that the taxpayer’s participation in real estate activities for the three years met the test in Section 469(c)(7)(B), and the court did not disallow the couple’s deductions for losses from rental properties.

If you would like more details, please do not hesitate to call our office. Our office has been successful in helping taxpayers with IRS and IDOR collection problems for over 25 years. If you have a tax or debt problem, please contact me at (847) 705-9698 or thughes@lavellelaw.com and find out how we can help you.

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