Real Estate Professional and Material Participation
I absolutely love getting the chance to interact directly with my TaxLoopholes clients (and some Diane’s Mastermind clients and my tax firm, Diane Kennedy’s Tax Services clients) when there are new tax issues happening.
And that’s exactly what happened this past weekend. We spent a lot of time going over the Real Estate Professional audits and the distinctions that the IRS is making. There is a lot of confusion among tax professionals as well on this one.
There are TWO requirements to taking the real estate passive loss deduction against other income if your income is over $150K:
(1) You have to be a real estate professional (and this is the one most people concentrate on)
AND
(2) You must materially participate in the property.
(2) is where most people get into trouble. These are two separate and distinct standards. In reality, hours that you spend in one can often translate to the other. For example, if you are materially participating in the property by screening tenants, showing the property and leasing it you also have hours that count toward your real estate professional status.
But just because you’re a real estate professional, it doesn’t mean you get the deduction if you don’t have material participation.
I cover that in more in detail in The IRS Survival Guide to Real Estate Professionals with Real Estate Investments
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Diane,
We ordered your IRS Survival Guide for Real Estate Professionals as we were headed into an audit. After listening to, and reading, the material, we were very confident as we had everything in place. Our real estate activity is comprised of 4 gulf front condos in Florida; which we rent ourselves. We do use a management company on a limited basis just to handle key exchange, money transactions, and maid service. We claim my wife as a real estate professional as she spends many hours booking our condos. My wife does have a full time job, but her logged hours are much greater. Additionally, we have a rental property in Cincinnati (where we live) and we also purchase REOs and rehab them to rent or sell. Our CPA said we were in good shape and she had aggragated our 4 properties in Florida… what a relief to find that out! We attended the audit with our CPA and upon leaving we felt we had satisfied all of their concerns, and our auditor even seemed impressed with our time log. Then came the phone call with a letter to follow, they denied our real estate professional hours based on the following reasons…
Because at times we rent our units in Florida for less than seven days this is no longer rental activity nor material participation, but instead we are running a business????
They also disallowed our time log for searching for properties in Cinncinati, and here is an exact line from our log..
date time spent Activity 8/2/2006 6.5 hours Physically inspected 6 bank owned properties in Forest Park, OH for possible purchase.
The auditor’s exact words were ” how do we know you actually did that” Now they are calling us liars!
We are appealing the decision but are very nervous as we would owe 40,000 in taxes which would wreck all that we have acheived. Can anyone offer advice? Also, I know this is out of anger, but the auditor did deny our basic rights as it states ” the audit will take place at a time and place convenient to you” we asked that the audit take place at our CPA’s office and the audit officer told us she could not do that. Long shot, but is there any recourse with that?? Any advice would be helpful, thanks Casey