Limited Passive Losses Allowed as Wife Actively Participated in Rental Real Estate Activity; Accuracy-Related Penalty Not Imposed (Manalo, TCS)

Married taxpayers were entitled to deduct a portion of their rental real estate losses for the two tax years at issue and were not subject to the accuracy-related penalty. While the wife was a licensed real estate broker and helped manage the couple’s properties during the years at issue, she failed to prove that she materially participated in either of the couple’s rental real estate activities as required by Code Sec. 469(c)(7).

The couple failed to maintain a contemporaneous time log that detailed their real estate activities, and the means by which they estimated the time they spent performing services in their rental real estate activities were not reasonable under Temporary Reg. §1.469-5T(f)(4). Therefore, the couple failed to establish that the wife spent more than 100 hours in each of their rental real estate activities. However, they satisfied the active participation standard and, thus, were entitled to deduct a portion of the losses from their rental real estate activities pursuant to Code Sec. 469(i), subject to the phaseout calculation under Code Sec. 469(i)(3).

The couple was not liable for the accuracy-related penalty because they had reasonable cause to believe that the wife qualified as a real estate professional and materially participated in their real estate activities. The evidence established that the wife devoted a great deal of time to her business as a real estate broker and made management decisions in connection with the couple’s rental activities. In addition, the couple provided calendars that were generally credible and prepared contemporaneously with the appointments noted therein and testimony regarding their real estate activities was corroborated, not only through documentary evidence, but also by the testimony of the IRS’s witnesses.

D. Manalo, TC Summary Opinion 2012-30

Other References:

Code Sec. 469

CCH Reference – 2012FED ¶21,966.45

CCH Reference – 2012FED ¶21,966.53

CCH Reference – 2012FED ¶21,966.568

CCH Reference – 2012FED ¶21,966.575

Code Sec. 6662

CCH Reference – 2012FED ¶39,652.38

Tax Research Consultant

CCH Reference – TRC REAL: 6,056.10

CCH Reference – TRC BUSEXP: 33,106

CCH Reference – TRC BUSEXP: 33,154.15


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