No Deductions Allowed to Agent Investor

[Scott McCadden]

As part of my regular routine of checking the "tax news", I came across a recently released tax court case, TC Summary Opinion 2018-27.  

Bottom line, a licensed real estate agent deducted mileage for visiting houses for possible investment, never invested in any houses and the IRS audited his returns.  Despite already being a licensed real estate agent, the deductions were disallowed because the business of real estate investing never got started.

Official government source material: https://www.ustaxcourt.gov/UstcInOp/OpinionViewer....

Good write up by a tax professional: https://www.currentfederaltaxdevelopments.com/blog...

[Michael Plaks]

@Scott McCadden

Thanks for sharing, Scott.

This is an extremely interesting case, because many tax professionals, myself included, would disagree with the Court's interpretation of whether their business has commenced. More importantly - 100% of the investors would disagree.

Which is why reading this case is so important! Not only the IRS takes a strong position that no income = no business - but the Tax Court sided with the IRS! They even added penalties, denying "in good faith" argument from the taxpayer. Agree or not agree - this is the result to be expected if you follow the same path.

Lesson:

Don't be greedy! Spending and deducting $40,000 of expenses over two years of $0 income is a recipe for disaster.

PS. Spending $40,000 to make $0 in two years is also a pretty awful business model.