Facts: An owner of two rental properties spent 800 hours a year actively managing them as a second job, spending more hours working in a primary profession. The owner claimed rental real estate loss deductions on his tax return as passive activity losses available to real estate professionals.
Claim: The Internal Revenue Service (IRS) issued a notice of deficiency, claiming the owner was not entitled to passive activity loss deductions since he was not a real estate professional, as, despite working the minimum hours rendering real estate services, he spent more time working in a primary profession unrelated to real estate.
Counter claim: The owner claimed he was entitled to passive activity deductions for his rental property losses since he maintained his rental property for the minimum hours required to be considered a real estate professional.
Holding: A federal tax court held the owner was not entitled to passive rental real estate losses since he did not satisfy both criteria of a real estate professional as he did not spend more time managing his rental properties than in his primary profession; however, he was entitled to partial deductions for the hours spent actively managing his properties. [Anyika v. Commissioner of Internal Revenue (March 24, 2011) _ TC _]
Editor’s note: The property owner in this case worked as a full-time engineer and viewed his rental activity as a second job. In order to qualify for rental real estate loss deductions, more time must be spent actively managing real estate than in any other profession, for at least 750 hours a year (the amount required to be considered a real estate professional in the eyes of the IRS). The property owner qualified as a real estate professional, but did not meet the full criteria to receive deductions. [Read more about properly reporting rental loss tax deductions in Tax Benefits of Ownership, Chapter 10, Commingling rental losses with other income]