Taxpayers that own rental real estate property will often want to qualify as “real estate professionals” under Section 469 (the “passive loss rules”). If they do that, their losses from their real estate activities can be used to offset other income beyond the $25,000 that is allowed – otherwise, they can only apply those losses against passive activity income.
Normally, a taxpayer will need to show that he or she spent at least 750 hours in the year on rental activities to qualify as a real estate professional for this purpose. However, there is a second requirement that must be met, which will make the real estate professional label difficult to obtain for taxpayers who also work other jobs, as demonstrated in a recent Tax Court case.
In Hassanipour, T.C. Memo 2013-88, Mr. Hassanipour owned 28 rental units in California. With that number of units, it should have been easy to show the 750 hours requirement was met. However, the passive loss rules also require that more than one-half of the personal services performed in trades or businesses by the taxpayer during the year are performed in real property trades or businesses in which the taxpayer materially participates. Since Mr. Hassanipour also worked a full time job outside of the real estate professional, he thus would have also had to show that he worked more than the 1500-1600 hours or so that he worked at his other job. This obviously is a much higher burden, and Mr. Hassanipour was unable to satisfy the court that he worked that level of time in both his regular job and in his real estate business. This burden will also make it difficult for others working full-time jobs to qualify as real estate professionals.
Taxpayers who can meet the hours requirements should keep contemporaneous time records to be able to prove it if questioned. Further, unlike Mr. Hassanipour, they should NOT present to the court evidence of contemporaneous time records on a paper calendar that bears a copyright date on it that is AFTER the years it was supposedly being used to track.
Hassanipour, T.C. Memo 2013-88