There is an issue that keep appearing in cases coming out of the Tax Court: Large rental losses taken by taxpayers claiming to be real estate pros.
Real estate professionals must meet two tests to beat the passive-activity loss rules
and deduct their rental losses in full.
- They must spend over half their working hours
- more than 750 hours a year materially participating in real estate activities.
The IRS often has success in court when challenging real-estate pro status.
Here, a couple deducted a big rental loss. The husband had a real estate license and worked full-time as a firefighter, and the wife held down two jobs as a nurse.
Neither the husband nor the wife separately put in enough hours to qualify as a real estate pro, so the write-off is axed (Whoriskey, TC Summ. Op. 2021-30).
Note that the couple also did not qualify for another exception, which allows $25,000 of rental losses to be deducted by people who actively participate in a rental activity, because their modified adjusted gross income exceeded the $150,000 phaseout limit.