A taxpayer who owned a rental property was denied real estate professional status by the IRS, resulting in a large tax assessment. With the IRS deadline to appeal the assessment already passed, Friedman LLP’s tax controversy group was called upon to provide assistance.
The group stepped in and immediately took action–reaching out to the IRS on behalf of the client to request audit reconsideration, which was approved and the case was reopened. With the group’s deep knowledge in handling a wide breadth of tax controversy matters—among them real estate professional status—we recognized that in order to qualify as a real estate professional you must meet three standards:
- You must materially participate in a real estate business. The business of renting and leasing realty is a real estate business;
- More than 50% of the personal services you perform in all businesses during the year must be performed in real estate businesses in which you materially participate; and
- Your personal services in material participation real property businesses during the year must be more than 750 hours.
Material participation in an activity means involvement in the operations of the activity on a regular, continuous, and substantial basis. It’s important to note that in the calculation of the 750 hours, you cannot count any work that you perform as an investor.
With this broad expertise, the group meticulously reviewed detailed records to be able to support that the taxpayer did indeed meet the 750 hours of activity spent on this activity. Ultimately, upon audit reconsideration the IRS ruled that the taxpayers did qualify as real estate professionals, and not only was the tax assessment waived, but a refund was issued for nearly $10,000.