Andrew M. D’Avanzo and his wife, Linda, own five rental properties. On their income-tax returns, Andrew and Linda claimed (1) material participation in managing their rental properties and (2) $32,258 rental property tax losses as a “real estate professional.”

But the IRS denied the rental property losses. Andrew and Linda paid the disputed $9,129 tax and then sued for a tax refund in the U.S. Court of Federal Claims.

Purchase Bob Bruss reports online.

Andrew was a full-time computer salesman, but he “guesstimated” for the court the amount of time he spent managing and repairing the rental properties. Linda is a full-time school teacher.

To qualify for the unlimited rental property tax loss deductions as a “real estate professional,” Andrew or Linda must prove they spent more than 50 percent of their working time on their rental properties, and at least 750 hours of time during the year in real estate activities.

If you were the federal court of claims judge would you rule Andrew or Linda is a “real estate professional” spending at least 50 percent of his/her working time on rental properties to claim unlimited deductions?

The judge said no!

For a rental property investor to claim unlimited tax loss deductions against his or her other ordinary income, the judge explained, the taxpayer must prove “material participation” in managing their properties. Andrew and Linda have proven they managed their own rental properties and made significant management decisions, the judge noted.

However, neither Andrew nor Linda were able to prove they spent more than 50 percent of their working hours managing their properties while holding other full-time jobs because they failed to keep detailed time records, the judge emphasized.

Equally important, neither taxpayer proved he/she spent more than 750 hours during the tax year in real estate activities, so they don’t qualify as a “real estate professional” entitled to unlimited rental property tax loss deductions, the judge ruled.

Therefore, Andrew and Linda are limited to $25,000 maximum annual tax loss deductions from their rental properties, he concluded. The IRS is ordered to refund $8,305 plus interest, and the taxpayers can save their unused deductions for future tax years, he noted.

Based on the 2005 U.S. Court of Federal Claims decision in D’Avanzo v. U.S., 2005-2 USTC 50497.

(For more information on Bob Bruss publications, visit his
Real Estate Center


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