The taxpayer owned nine real estate properties in addition to his personal residence. He treated all nine properties as rental properties on his tax return and deducted losses from the properties as a real estate professional. In addition to his real estate activity, he was employed as a salesman and earned roughly $120,000.
In general, IRC section 469 disallows passive activity losses incurred during the year. The code defines passive activities as including rental activities. An exception to this rule is when a taxpayer qualifies as a real estate professional. A taxpayer is relieved from passive loss treatment if all of the following requirements are met.
• The taxpayer performs more than one-half of his or her personal services in real property trades or businesses in which he or she materially participates, and
• The taxpayer performs more than 750 hours of services in real property trades or businesses in which he or she materially participates.
The taxpayer argued that he qualified as a real estate professional. In court, he testified that over one-half of the total time he spent in business activities was devoted to his real estate business. The court found the taxpayer to be generally honest and forthright. However, his time estimate was suspect given his employment as a salesman for an employer in a business unrelated to the real estate activity. His subjective estimate also suffered from a lack of contemporaneous verification by written records or other evidence.
Regulation section 1.469-5T(f)(4) says: “The extent of an individual’s participation in an activity may be established by any reasonable means. Contemporaneous daily time reports, logs, or similar documents are not required if the extent of such participation may be established by other reasonable means. Reasonable means for purposes of this paragraph may include, but are not limited to, the identification of services performed over a period of time and the approximate number of hours spent performing such services during such period, based on appointment books, calendars, or narrative summaries.” The court said the regulations do not allow an after-the-fact “ballpark guesstimate” of time committed to participation in a rental activity. Without any kind of credible evidence other than the taxpayer’s oral testimony, the taxpayer did not prove he spent over onehalf his work time in the real estate business. Therefore, he was not a real estate professional and could not deduct his passive losses in excess of his passive income.