REAL ESTATE PROFESSIONALS NEED A LOG OF TIME SPENT FOR RENTAL LOSS by John R. Bullis
Peter Hofinga and his wife Margaret Wong lost their U.S. Tax Court case to deduct rental losses on their returns. They did not prove he spent 750 hours a year working on the real estate rental activities.
They owned eight rental properties in 2006 and nine rental properties in 2007. They made the election for federal income tax purposes to treat all of the rental properties as one activity.
He did most of the management from his den/office in their home. But he did not keep a record, a log, a listing of time spent on the rental properties for each year.
The general rule is rental property losses are considered passive activity losses unless it is proven the taxpayer had “material participation” in the rentals.
The court noted Professor George S. Jackson wrote “…the code section 469 exemplifies why federal tax law is incomprehensible for most citizens.” The court said that section is complicated.
The rental loss deduction for taxpayers with more than $ 150,000 of Adjusted Gross Income (as the case here) is not allowable if the taxpayer die not materially participate.
To be a real estate professional, he must perform more than 750 hours of service during the taxable year and more than 50% of the personal services in all trades or businesses in the year. Mr. Hofinga was not otherwise employed in those years so he had to meet the 750 hours rental activities requirement for each year.
It seems the taxpayers were not aware of the need to maintain a contemporaneous log or record of time devoted to the rental real estate activity on an event-by-event basis. They did not keep such a record.
But your friend the IRS says you can prove the 750 hours by other reasonable means.
They used calendars, bank statements, credit card records, property trip files, bills, receipts, and other records to construct the logs. Unfortunately many of the entries had exactly the same explanation. The court found the evidence did not satisfy the 750 hours each year requirement and the rental losses were disallowed for 2006 and 2007.
It is a shame the tax laws and regulations are complicated and a heavy burden. But if you have rental losses, it is important to keep the records of the time spent and what was done.
Those losses are not lost, just postponed to a year when the rental has profits or is sold.
Did you hear “The trouble with making mental notes is that the ink dries too fast.”