Recent Tax Court Case on Failed Real Estate Professional...Again!

[John Malone]

A recent tax court case shows why the IRS is so successful in winning REP cases against taxpayers.  The case Gregory F. Teague et al. v. Commissioner was pretty easy for the IRS to win.  Honestly, quite surprised this was appealed all the way to TC.

https://www.taxnotes.com/research/federal/court-documents/court-opinions-and-orders/deduction-for-real-estate-losses-is-subject-to-phaseout/7gkbp?highlight=*

Facts:

- Husband worked as a remote salesperson for Comcast.  This was a fulltime job, though he argued he had a lot of "flexibility".  

- Spouse did not work full time

- Two rental properties, one in NH and one in Maine in which they bought to renovate

Outcome:

- Taxpayers forgot to group the activities as one for material participation, although this still would not have helped them most likely.  It is unclear if this was a DIY tax return or a professional failed to make the Election. 

- Taxpayers kept 0 time logs but were able to show they traveled to renovate the properties quite frequently.  He said he was able to multitask his Comcast job w/ the real estate (tough argument). They only allowed 300 of the 1200 hours he claimed!  Ouch.

- Judge found they were not credible and there was no way that the husband worked 12 hour real estate business days during the days he spent at the properties.  Whether or not it was true, the judge did not buy it.  Thus - they did not spend >50% of all working hours on real estate and the loss was denied.

Lessons Learned:

- Contemporaneous time logs, although not 100% required by law, will help you with a TC judge

- Full time W2 EEs will not qualify in 99.9% of circumstances.  

- They failed to show that the spouse, who did not work, was involved which could have helped "Petitioners do not contend that Mrs. Teague separately qualifies as a real estate professional, and so we do not further consider time she spent in these activities."

- During audit and during the testimony, the taxpayer gave different fact patterns.  This ruined the credibility in the judge's eyes.  

These cases are really a dime a dozen but should be used as learning lessons for those looking to claim REPS status in a given year!