Recent Tax Court Case on Failed Real Estate Professional...Again!

[John Malone]

A recent tax court case shows why the IRS is so successful in winning REP cases against taxpayers.  The case Gregory F. Teague et al. v. Commissioner was pretty easy for the IRS to win.  Honestly, quite surprised this was appealed all the way to TC.

https://www.taxnotes.com/research/federal/court-documents/court-opinions-and-orders/deduction-for-real-estate-losses-is-subject-to-phaseout/7gkbp?highlight=*

Facts:

- Husband worked as a remote salesperson for Comcast.  This was a fulltime job, though he argued he had a lot of "flexibility".  

- Spouse did not work full time

- Two rental properties, one in NH and one in Maine in which they bought to renovate

Outcome:

- Taxpayers forgot to group the activities as one for material participation, although this still would not have helped them most likely.  It is unclear if this was a DIY tax return or a professional failed to make the Election. 

- Taxpayers kept 0 time logs but were able to show they traveled to renovate the properties quite frequently.  He said he was able to multitask his Comcast job w/ the real estate (tough argument). They only allowed 300 of the 1200 hours he claimed!  Ouch.

- Judge found they were not credible and there was no way that the husband worked 12 hour real estate business days during the days he spent at the properties.  Whether or not it was true, the judge did not buy it.  Thus - they did not spend >50% of all working hours on real estate and the loss was denied.

Lessons Learned:

- Contemporaneous time logs, although not 100% required by law, will help you with a TC judge

- Full time W2 EEs will not qualify in 99.9% of circumstances.  

- They failed to show that the spouse, who did not work, was involved which could have helped "Petitioners do not contend that Mrs. Teague separately qualifies as a real estate professional, and so we do not further consider time she spent in these activities."

- During audit and during the testimony, the taxpayer gave different fact patterns.  This ruined the credibility in the judge's eyes.  

These cases are really a dime a dozen but should be used as learning lessons for those looking to claim REPS status in a given year!

[Joseph Palmiero]

Great summary!  Yes, it is tough to prove Real Estate Professional status without time logs and while working a full time job.

[John Malone]

@Joseph Palmiero this one was over a $20k loss so rather surprising it ended up in Tax Court!

[Michael Plaks]

This case is not even worth analyzing, it is so weak. The guy did not have a chance to win this one, which any of us RE-specialized accountants would have told him.

The only value of this case is in reminding investors: REPS is not a casual checkbox election. You do have to qualify. The IRS does verify whether you qualify, quite often. So don't try it "just in case" if you can't qualify - chances are that you will not fly under the radar. 

This guy got lucky to escape the extra penalties. Most don't.

[Bill Brandt]

Did he spend more fighting the case than he TEMPORARILY would have saved in taxes? (Temporarily because he was just pulling deductions forward, not creating new ones.) Hopefully he was doing his taxes himself and accidentally clicked on the tax pro option not knowing he needed to qualify. Or thought nobody ever checks.

[Russell Brazil]

As far as I know, there are only 2 cases where a full time w2 successfully defended their claim to real estate professional status out of tens of thousands who were not successful.

[John Malone]

@Russell Brazil yes a few court cases on Pilots (one was a boat pilot) who had odd schedules

[Natalie Kolodij]

I loved this case and made a few videos on it 

Because it was literally like a list of everything we warn you about what not to do..all done by one taxpayer. 

I also like the part where he argued he worked 12 hour days every day he was at his lake house..but oh ya...of course occasional BBQ time and taking kids on the boat tubing. But that time was hardly any lol...okay sir.