In our recent post on the Windham v. Commissioner case, we described how a stockbroker who worked only a few hours a day at Wells Fargo was able to qualify as a real estate professional due to the extensive time she
spent managing her numerous properties.
The Tax Court was more skeptical when a dentist made a similar claim in an attempt to take deductions for the significant losses he incurred from 2010 through 2012. In this blog post, we will explain how he also prevailed.
Zarrinnegar v. Commissioner
Dr. Mohammad Zarrinnegar and his wife, Dr. Mary Dini, worked shifts at their joint dental practice. When he wasn’t tending to people’s teeth, Dr. Zarrinnegar managed the couple’s four rental properties and conducted brokerage-related activities such as tours, open houses, property viewings, and client meetings. The couple reported income from their dental practice each year, and real estate losses of $221,582 for 2010, $242,276 for 2011, and $220,788 for 2012. The IRS disallowed the deduction they claimed for those real estate losses, determining that they were passive activity losses that could only be used to offset passive activity income.
Rental activities are generally considered passive unless the taxpayer can demonstrate that they qualify as a real estate professional. To qualify as a real estate professional, you must prove that you spent more than 750 hours during the year on real estate activities, and that more than one-half of the work you performed that year was in a real property trade or business in which you materially participated.
Zarrinnegar was able to satisfy all these requirements through:
- Logs of his hours
- Testimony that these logs had been prepared contemporaneously
- Detailed and lengthy testimony about the contents of his logs
- Testimony of other witnesses, including his wife
All of the testimony was deemed credible and corroborated Zarrinnegar’s logs indicating that he spent more than 1,000 hours on his real estate activities during each of the years at issue, more than the required 750 and more than the approximately 728 hours he spent each year as a dentist.
The Tax Court, therefore, permitted all of his claimed deductions.
California real estate and tax attorneys
The real estate and tax attorneys at Moskowitz, LLP have extensive experience assisting real estate professionals and investors with their tax planning and audit representation. Contact our San Francisco office for a