The IRS typically scrutinizes giant deductions for rental actual property losses claimed by so-called “actual property professionals.” In a brand new case involving a pair that wholly owned a partnership, Dunn, TC Memo 2022-112, 11/29/22, the Tax Court denied losses as a result of neither partner met the requisite tax regulation check.
Generally, buyers in actions corresponding to actual property by which they don’t materially take part can solely take deductions as much as the quantity of their passive earnings for the 12 months. Thus, they will’t declare any annual passive exercise loses (PALs), though there’s a restricted PAL write-off for actual property buyers qualifying as “energetic members.”
Normally, you should utilize as much as $25,000 of loss to offset non-passive earnings if you’re an energetic participant. But the $25,000 offset is phased out for a modified adjusted gross earnings (MAGI) between $100,000 and $150,000 of MAGI. Note: This phase-out provision just isn’t listed for inflation.
However, in case your actual property actions rise to the extent of being an actual property skilled, you may deduct a loss in opposition to non-passive earnings, similar to every other enterprise. There are two key necessities for qualifying as an actual property professional.
1. More than half of the private companies you carry out in all trades or companies through the tax 12 months are carried out in actual property trades or companies by which you materially take part.
2. You should spend greater than 750 hours in your actual property trades or companies.
As lengthy as you fulfill this two-part check, actual property actions by which you materially take part aren’t handled as passive actions. But the IRS sticks to the strict letter of the regulation.
Facts of the brand new case: A married couple, residents of Georgia, shaped a partnership to handle inheritor actual property properties. Each partner had a full-time job through the tax years in query.
The couple filed joint tax returns for 2013 and 2014. They reported losses of $85,260 and $48,740, respectively, referring to the true property properties topic to the PAL guidelines. The couple produced logs purportedly present their collective rental actual property actions throughout that point.
The logs present 767 hours labored in 2013 and 407 hours labored in 2014. However, the logs didn’t specify which partner labored these hours. In addition, the Tax Court mentioned that the hours recorded within the logs have been inflated to incorporate hours spent bodily current on the properties.
Does both partner qualify beneath the check for actual property professionals? The Tax Court examined the information.
First, the couple contended that they each spent greater than one-half of the private companies they carried out in a commerce or enterprise in actual property trades or enterprise. But the Tax Court disagreed. The proof didn’t help this conclusion.
Second, the couple additional argued that they met the 750-hour requirement. To meet this requirement, just one partner must have reached the 750-hour mark. But the Court wasn’t satisfied that both partner happy this burden. Accordingly, the Tax Court dominated that the check for actual property professionals wasn’t met.
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