If a taxpayer is trying to qualify as a real estate professional on the basis of a rental real estate business with multiple rental real estate interests, and he has a job unrelated to those activities which takes up a substantial amount of time, it is important to track all real estate related hours in order to meet the requirement for material participation. The Tax Court recently substantiated a strategy which allows taxpayers to count more of their hours towards real estate activities.
Real estate professionals may treat otherwise passive rental real estate activities as non-passive if they materially participate in the rental activity. Losses from these activities can be used to offset wages, interest and other non-passive income. This tax treatment is only available to eligible taxpayers who are considered to materially participate in the rental real estate activity.
An individual is an eligible taxpayer for any tax year if:
- more than 50% of personal services performed by the taxpayer in all trades or businesses during the tax year are performed in real property trades or businesses in which the taxpayer materially participates, and
- the taxpayer performs more than 750 hours of service during the tax year in real property trades or businesses in which the taxpayer materially participates. This criteria requires actual performance of services. The Tax Court disallowed a taxpayer’s “on call” and “willing to work” hours to count towards this 750-hour requirement.
The Tax Court recently determined that a taxpayer’s travel time related to managing her rentals counted towards the material participation requirements related to claiming the rental loss as active. The details of this case, Richard S. Leyh and Ellen P. O’Neill, TC Summary Op. 2015-27 are noted below:
Taxpayers lived approximately 26–30 miles from the city where their 12 rental properties were located. The wife regularly drove into the city, which took approximately 42–55 minutes depending on the route, to resolve problems, perform maintenance, and administer and operate the rental properties. She contemporaneously maintained a log detailing the type of rental property activity she engaged in that day and the number of hours spent in the activity. The original log did not include time spent traveling to the properties and reflected 632.5 hours, which is less than the 750 hours required to be considered a real estate professional (and deemed to materially participate) under IRC Sec. 469(c)(7)(B). During an examination of the 2010 tax return, the petitioners revised and resubmitted the log to reflect the 1.5 travel hours per trip. The IRS refused to accept the additional hours. Based on the petitioner’s revised log (which reflected a total of 846 hours) and her credible testimony, the Tax Court determined she met the 750-hour test and was entitled to apply the rental losses against their non-passive income.