$271,779 in Passive Losses Disallowed by Tax Court

[Paul Allen]

As has been pointed out often on this forum - you must meet strict criteria to claim to be a real estate professional. Claiming that status when you do not meet the criteria can cost you a lot of money...

M & M v. Commissioner:

Mr. and Mrs. M owned 8 rental properties in 2008 and 6 in 2009. Neither was a licensed real estate broker or salesperson. (Mr. M was a middle school teacher.)

Claiming to be real estate professionals, in 2008 they claimed $154,067 on Schedule E as rental real estate [passive] losses and $117,712 in 2009. The IRS denied their status as real estate professionals and disallowed the passive losses. The Ms took their case to Tax Court (representing themselves).

To substantiate their claim of being real estate professionals they produced a journal, which the tax court noted:

The Tax Court agreed with the IRS determination the Ms are not real estate professionals and disallowed the passive losses. They also assessed an accuracy related penalty on the Ms.

The moral of the story: get help from a tax professional before you end up in hot water with the IRS. It can save you money in the long run.