Taxpayer Wins in Tax Court - Another Real Estate Professional Case

The name of the case: Patricia S. Windham v. Commissioner, (TC Memo 2017-68)

Date opinion was issued: April 24th, 2017

The issue: The taxpayer was a part-time stockbroker. She also owned and managed 12 rental real estate properties during the 2010 tax year. The taxpayer handled every aspect of the rental properties, including collecting rent, finding and vetting tenants, and scheduling repairs. She also maintained insurance on each rental property and maintained services for general upkeep on the properties when vacant. She also maintained records for each rental property and worked with a CPA to prepare the tax returns.

Her tax returns claimed: The taxpayer reported $285,437 in W-2 income. She also attached a Schedule C, Profit or Loss From Business, to her Form 1040, which reported a loss of $307,933 from her rental properties. The taxpayer did not attach an election to treat all her rental properties as one activity to her 2010 Form 1040.

The IRS claim: The IRS claimed that she was not a real estate professional and, therefore, could not deduct the losses attributed to her rental properties because they were passive losses.

The taxpayer's claim: The main claim the taxpayer was making was that she was a real estate professional and, therefore, the real estate losses should be nonpassive. She argued she could provide information to the tax court to substantiate her treatment as a real estate professional.

What is a Real Estate Professional? A taxpayer would be a real estate professional if the taxpayer spent more than 750 hours AND more than half of their personal service hours in a real estate trade or business during the taxable year. In addition to this, the taxpayer must materially participate in the real estate activity to treat it as nonpassive. Many tax court cases flesh these requirements out based on real-world scenarios.

Findings: The tax court decided there was sufficient evidence for treating her as a real estate professional, primarily due to the documentation and testimony that the taxpayer provided to the Tax Court. The Tax Court recognized that she only worked as a part-time stockbroker and audited additional facts and circumstances of her real estate activities, determining she met the qualifications of a real estate professional.