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TAXPAYER V. THE EARTH'S ROTATION

August 24, 2004

In this busy world, who hasn't wished for more hours in the day? Alexander Firsow probably has.

Mr. Firsow deducted losses with respect to two rental properties he owned with his wife. The tax law normally treats rental losses as “passive,” deductible only to the extent of “passive” income, or upon disposal. “Active” taxpayers can deduct up to $25,000 in rental real estate losses, but only if their adjusted gross income is less than $150,000.

A special rule exempts “materially-participating rental real estate professionals” from “per se” passive treatment. Qualifying taxpayers may apply the same passive loss rules that apply to non-real estate activities to determine if their real estate losses are passive. This generally requires 500 hours of participation in an activity, or split among multiple activities of at least 100 hours each.

To qualify as a “materially-participating rental real estate professionals,” taxpayers have to clear two hurdles:

      ·They have to participate in real estate 
      activities more than 750 hours, and 

     ·Their real estate participation has to exceed
      their participation in any other activity.

MAYBE IF THEY HADN'T GONE FISHING...

Mr. Firsow prepared a spreadsheet for the IRS examiner showing participation in a Sanibel Island rental property of 606 hours in 1999 and 494 hours in 2000. Even though Mr. Firsow used a real computer to prepare the spreadsheet, the IRS agent wasn't convinced, and the case went to Tax Court.

The sharp-eyed judge, noting that the taxpayers were Maryland residents, sensed a weakness in the argument:

   Petitioners spent no more than 2 weeks per
   year at the Sanibel property, performing 
   maintenance work, but also fishing off the 
   pier.

The arithmetic: 14 days x 24 hours = 336 hours available to work (less fishing time).

Add 300 hours of work at the other property: 336 + 300 =636.

636 < 750.

The ruling: IRS > Taxpayer.

The moral? Do the math. Or, consider investing in property on Venus, which has a “day” 243 Earth-days long.

Cite: Firsow v. Commissioner, T.C. Summary Opinion 2004-112.

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