Driving Time Qualifies for Hours Test
This is great case for Jupiter Real Estate Professionals who are on the borderline of not qualifying for their losses. The IRS are sticklers about meeting certain test in the real estate industries since there are many part time real estate professionals. The case below outlines what happens to agents who were audited and had close call to paying a significant amount of tax. Luckily they had great records…
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Abacoa CPA’s
Serving Jupiter and Palm Beach Gardens
Under IRC Sec. 469, a Rental Real Estate (RRE) activity is a passive activity by definition you qualify as a real estate professional. Real estate professionals must treat rental real estate activities in which they materially participate as nonpassive activities. Therefore, they can deduct these losses from other nonpassive income.
Generally, an individual qualifies as a real estate professional for a year if both of the following apply.
1. More than half of the personal services performed in trades or businesses during the year are performed in real property trades or businesses in which the taxpayer materially participates.
2. The taxpayer performs more than 750 hours of services during the year in real property trades or businesses in which he materially participates.
For married couples filing a joint return, the spouses’ activities can be combined to determine whether they materially participate in their rental real estate activities. But, one spouse must separately satisfy the more-than-50% of personal services and the more-than-750 hours test.
In applying the more-than-750-hours test, the Tax Court recently ruled that time traveling to/from rental properties qualifies.
Court Case Facts
The wife worked regularly in the RRE activity. She was responsible for operating the rental properties—including advertising properties, interviewing/vetting potential tenants and handling the repairs/maintenance for the properties. The 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, 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.
The taxpayers deducted a $69,531 loss for the RRE activity on their 2010 tax return that reduced their nonpassive-activity income.
Taxpayer and IRS Position
During an examination of the 2010 tax return, the taxpayers presented the original log that accounted for 632.5 hours spent in the real estate activity. The petitioners revised and resubmitted the log, including 1.5 travel hours per trip. The revised log attributed 846 total hours to the activity.
The IRS agreed that the taxpayer materially participated and spent more than half of her time in the RRE activity. However, the IRS contended the second test, the 750-hours test, was not met because the original log fell short of the 750 hours. They refused to consider the revised log arguing that it was insufficient to remedy the perceived shortfall in the original log.
Court Decision. Based on the taxpayer’s detailed contemporaneous log and credible testimony, the Tax Court determined that it was easy to identify the days when the RRE activities involved travel and allowed the revisions to the log. Thus, the Tax Court determined she met the 750-hours test and was entitled to apply the rental losses against their nonpassive income.