The Importance of Keeping a Contemporaneous Time Log in Rental Real Estate When Claiming Real Estate Professional Status

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The Importance of Keeping a Contemporaneous Time Log in Rental Real Estate When Claiming Real Estate Professional Status

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Date: 09/26/11

Topic: Real Estate Professional Audits

Taxpayers who claim to be real estate professionals often face the loss of real estate professional status because of the lack of contemporaneous time logs for rental real estate activity under audit and subsequently appeal or where ultimately litigating the issue. Recently I was 100% sure I won a challenge to a client’s status as a real estate professional when my client and I were sitting with an appeals officer. He conceded the battle when I presented him with a mountains of evidence that I had the client bring to the appeal. After the client and I left thinking we had won, the agent apparently spent some time with IRS Chief Counsel’s Office in deciding to go on the offensive once more… Grrrr….

I have a mountain of evidence that I’m prepared to present in tax court for this client if it comes to it…

My support is under:

Reg. §1.469-5T(f)(4) Methods of proof.–

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 loosing case law in this area reads with tons of commentary similar to what follows: (I’m sure this is what chief counsel’s office told the appeals officer)

His self-serving testimony and noncontemporaneous logs prepared in connection with his audit to support the time he purportedly devoted to the rental properties were insufficient to demonstrate that he qualified as a real estate professional. Moreover, the taxpayer failed to carry his burden of proof that during the two tax years at issue he performed more than half of his personal services in real property businesses in which he materially participated. Finally, he also failed to prove that he worked more than 750 hours a year in those real estate activities.–CCH.

Her uncorroborated estimates of time spent on rental activities were not reasonable and did not reflect the hours that she devoted to the activities. Moreover, the taxpayers did not materially participate in the operation of the excluded property because they did not spend the requisite amount of hours in the activity. Therefore, their trade or business relating to the property was a passive activity and the losses incurred were subject to passive loss limitations. –CCH

A married couple’s rental real estate activities were passive and, therefore, their claimed loss was disallowed. The wife did not qualify as a real estate professional under Code Sec. 469(c)(7)(B)(ii) because she did not perform more than 750 hours of service in her real estate rental activities. One of the couple’s properties was rented for periods averaging less than seven days; that property was not a “rental activity” under Temporary Reg. §1.469-1T(e)(3)(ii)(A). Therefore, the time the taxpayer spent on that property was excluded for purposes of the 750-hour real estate professional test under Code Sec. 469(c)(7)(B)(ii)). Since the taxpayer only performed 679 hours of service on her other rental real estate activities during the tax year at issue, those other activities were per se passive under Code Sec. 469(c)(2).–CCH

I think the appeal (and litigation if necessary) will turn on how well the client can document the time spent including identifying time the service will try and cull out…. (investing, property hunting est.)