I've gotten a little behind. So this one represents a few installments.
Our thanks to Moore McLaughlin, CPA, Esq and Cory Bilodeau, Esq. for another update.
In an opinion issued on May 19, 2015, the Tax Court in Redisch, TC Memo 2015-95, held that a couple did not convert their Florida vacation home to property held for the production of income. The rental effort was not serious and the property was never rented. As a result, they could not deduct Schedule E deductions related to the home or claim a loss under Code Sec. 165 when the property was sold for less than what they paid for it. In general, no deduction is allowed for the expenses incurred in maintaining a personal residence. Similarly, a loss incurred on the sale of a personal residence generally is considered personal in nature and can not be deducted. However, taxpayers may deduct all the ordinary and necessary expenses paid or incurred during the tax year for the management, conservation, or maintenance of property held for the production of income. Whether an individual has converted his personal property to one held for the production of income is a question of fact. In the case of a converted residence, the Tax Court often looks to five factors to determine the taxpayer's intent: (1) the length of time the house was occupied by the individual as his residence before placing it on the market for sale; (2) whether the individual permanently abandoned all further personal use of the house; (3) the character of the property (recreational or otherwise); (4) offers to rent; and (5) offers to sell. No one factor is determinative, and all of the facts and circumstances are considered. Similarly, in order for a taxpayer to deduct a loss, it must be incurred in a trade or business, be incurred in any transaction entered into for profit, though not connected with a trade or business, or arise from some sort of casualty or theft. A taxpayer can claim a loss on property purchased or constructed as a primary residence if, before its sale, it is rented or otherwise appropriated to income-producing purposes and is used for such purposes up to the time of its sale.
I noticed this case also and may be covering it on forbes.com [PJR]
Putting somebody from Bain Capital in charge of the Revenue Department seems kind of odd. Can't help but wonder whether it will be the fox watching the hen house or it takes a - well you know how that one goes.
In Jose A. Lamas v. Comm., TCM 2015-59 (03/25/15) the Tax Court concluded that two real estate development businesses (Shoma and Greens) could be GROUPED together because they met all five nonexclusive factors in Reg. 1.469-4(c) and were an appropriate economic unit in which T materially participated. The investor exception did not apply, and the work not customarily done by owners exception did not apply. Assuming arguendo that T worked < 500 hours in Shoma and Greens, T met the signification participation activity test #4 because he significantly participated in Bella Vista and in Shoma and Greens and materially participated for > 500 hours in all of his significant participant activities. Grouping as well as several other topics will be discussed in our full day seminar entitled Passive Activity Losses on 5/27 in Waltham. Grouping as well as all of the decided cases and administrative pronouncements on Grouping also will be discussed in detail in our new 1/2 day seminar entitled Grouping for Purposes of Sections 469 and 1411 on 6/12 in Waltham. Grouping can be used to deduct losses that otherwise would be passive and not deductible and also can be used to avoid reporting income as passive income subject to the 3.8% tax on net investment income. If you want to learn about Passive Activity Losses, Section 1411, and Grouping, come to a BTI seminar!!! Don't waste your time and money elsewhere.
Lamas is another case I covered on forbes.com. There was another fascinating back story involving deforestation and political intrigue that the rest of the tax blogosphere let pass.
On 4/13/15, the Tax Court (in Richard Leyh v. Comm., TC Summary Opinion 2015-27 dated 04/13/15) concluded that taxpayers who elected to aggregate their rental real estate activities and who kept a detailed contemporaneous log of the time spent operating their 12 rental properties were real estate professionals (REPs)who could deduct $69,531 of losses against their non-passive income such as wages. The court allowed the taxpayer wife to include the travel time in driving from their principal residence to the rental properties to perform services. Although a Tax Court Summary Opinion cannot be cited as precedent, it is comforting to see pro sese taxpayers (taxpayers who represent themselves) beat the IRS with a detailed contemporaneous log and travel time. The election to aggregate the properties also was critical to the taxpayers' victory. If you represent taxpayers who purport to be real estate professionals, you may want to advise them to make an election to aggregate (if they have not already done so), keep a detailed contemporaneous log of the time spent servicing the rental properties, and remember to include travel time in their original log. If you want to learn more about REPs, please join us at our full day seminar entitled Passive Activity Losses on 5/27 or at a special 1/2 day seminar entitled Real Estate Professionals on 6/12 in Waltham. Section 469 continues to be one of the most important, misunderstood, and heavily litigated areas of tax practice today!
I don't know why I let this one pass. Probably too worried about Kent Hovind.
Our thanks to Todd Weaver of Strategies for College for the following email!
Think that your role as business advisor, family confidant, and tax savings guru is all that you need to be concerned with? Think about this: You can offer a client a choice of $18,000 in tax savings OR a $38,450 college grant. That's a $20,450 difference. Attend our seminar and find out what actually happened. If you're not paying attention to clients with college bound kids, you could be saving tax dollars and losing college funding dollars. The ramifications of not being well informed could be very costly.
Come to our seminar entitled Strategies For College on June 24th at the Hyatt house in Waltham in order to learn how to deal with opportunities like this.
I always worry that when tax planning concepts appropriate for the very well heeled get pushed down a level or two that things like college financial aid get lost in the shuffle.
I'll try not to get so far behind on Lu's updates again, but I can't make that a firm promise.