Restructured Business Fails Passive Activity Loss Rules

Successful businesses change over time. We often see this when a business gets ready for the founder or owner to exit the business. The business is often reorganized and maybe even divided up. Various tax strategies come into play to help facilitate the transfer, like the F Reorganization for S corporations. Other plans to minimize…

What is a Rental Activity?

What Is A Rental Activity?

The ability to generate current year tax losses is a strong incentive for high-income taxpayers to own real estate. Real estate often produces tax losses, but not economic losses. This happens because the current operating expenses plus tax depreciation result in a current year loss. At the same time, the property likely increased in value…

Court Addresses Tax Losses from Short-Term Rentals

The Importance Of Accounting For C Corporation Expenses

Short-term rental properties are more popular than ever. Online services like Airbnb have made this possible. But how are tax losses from short-term rentals handled? Can the taxpayer use the rental losses to offset their non-rental income for tax purposes? The court addresses one aspect of these rules in Eger v. United States, 18-cv-00199-DMR (N.D.…

Documenting Real Estate Professional Hours

Documenting Real Estate Professional Hours

You buy real estate and hold it for rental income. The real estate produces losses. The losses are increased by various items, such as depreciation deductions, interest expense deductions, etc. You spend the year working on your rental properties and at your part-time job. Can you offset the income from your part-time job with your…

IRS Rejects Court’s Passive Activity Loss 5% Owner and Grouping Decision

Irs Rejects Court’s Passive Activity Loss 5% Owner And Grouping Decision

The passive activity loss (“PAL”) rules can limit the ability to deduct losses from passive activities, such as rental losses.  The real estate professional and activity grouping rules can allow taxpayers to avoid having their losses limited by the PAL rules.  Earlier this month, the IRS issued AOD  2017-007, IRB 2017-42 , to note its formal…

Court Says Mortgage Broker Not a Real Estate Professional

Irs Penalties For Late-filed Forms 5471

The passive activity loss rules can prevent real estate investors from being able to deduct their real estate losses.  That is the intent and purpose of the rules.  The rules and how they have been interpreted draw some known but arbitrary lines in the sand.  The recent Hickam v. Commissioner, T.C. Summary Opinion 2017-66, case…

Grouping Nonpassive Activities Under the PAL Rules

Grouping Nonpassive Activities Under The Pal Rules

Taxpayers are often surprised to learn that some losses may not be netted against gains in the current tax year. This is often due to the passive activity loss and material participation rules. The IRS National Office addressed these rules in TAM 201634022, in the context of whether two businesses should be grouped together and…

Real Estate Professionals Subject to Material Participation Rules

Real Estate Professionals Subject To Material Participation Rules

But can you be a real estate professional for the passive activity loss rules and then have your passive losses denied under the material participation rules?  The Gragg v. United States, No. 14-16053 (9th Cir. 2016) case presents an opportunity to consider this fact pattern. The Facts & Procedural History The taxpayer was a real…

Rental Losses for Real Estate Agents

Rental Losses For Real Estate Agents

Is a real estate agent a real estate professional? This is an important question if the real estate agent also owns rental real estate that throws off tax losses. The answer dictates whether real estate agents are able to deduct rental losses against non-rental income. The court addresses this question in Agarwal v. Commissioner, T.C.…