Does The IRS Agree Your Real Estate is a Business

Are you running your real estate investing as a business?  WARNING – the IRS might not agree.  In its continued assault on real estate investors, the Court held in Jafarpour and Prang v. Commissioner, TC Memo 2012-165, the taxpayers were not actively involved in a real estate trade or business nor was she a real estate professional and thus entitled to a full deduction for rental losses.

Prang is just one more taxpayer to fall under the IRS’s aggressive assault on real estate investors. (See these other recent attacks - Manalo v. Commissioner, T.C. Summary Opinion 2012-3, Harnett v. Commissioner, T.C. Memo 2011-191, O’Connell v. Commissioner, T.C. Summary Opinion 2011-43, Anyika v. Commissioner, T.C. Memo 2011-69, Carmickle v. Commissioner, T.C. Summary Opinion 2012-60)

Like in other cases, the IRS is attacking the investor’s record keeping used to substantiate the amount of time devoted to his real estate activities.  This has proved to be the Achilles heel for many unlucky souls who wind up in tax court.  Here is language from one opinion to give you an idea of the Court’s reasoning:

We find overall, however, that the means by which petitioners estimated the time they spent performing services in their rental real estate activities were not reasonable…The estimates in these revised logs, however, are uncorroborated and unreliable. The revised logs were prepared at various instances over a two-year period after the conclusion of respondent’s examination… The estimates on the revised logs appear to be more akin to the unacceptable ballpark guesstimates that we have rejected in the past.

If you haven’t done so already, begin keeping a log of your real estate activities.  The log entries should be contemporaneous with the activity.  Make an aggregation election on your 1040 to treat all of your real estate activities as one.   Develop a business plan and create a business entity to further buttress your intent to treat real estate as a business.

On July 21st and 22nd I, along with my CPA, Steve Kalt, will be discussing several steps you can take in 2012 to protect yourself from IRS attacks.  If you are interested in attending this workshop you read more about why you will lean by clicking on the button below.

All the best in life and investing,

Clint Coons, Esq