If on your taxes you claim status as a tax law–defined real estate professional who can deduct his or her rental property losses, in your time record for the year will need to prove the following:
- That you spent more than one-half of your personal service time in real property trades or businesses in which you materially participate, and,
- That you spent more than 750 hours of your personal and investor services time in real property trades or businesses in which you materially participate.
If you are married, either you or your spouse must individually qualify as a real estate professional. If one of you qualifies, both of you will qualify.
Achieving real estate professional status is the first of two steps. There is an additional hurdle that you face:
To deduct tax losses on a rental, you also must prove that you materially participated in the rental activity. If you are married, you and your spouse may count your joint efforts toward passing the material participation tests.
Most of the tests for material participation are based on hours worked. That being said, it is best to keep a time log.
In an audit of your real estate activity, here’s what the IRS tells the examiner:
“Request and closely examine the taxpayer’s documentation regarding time. The taxpayer is required under Reg. Section 1.469-5T(f)(4) to provide proof of services performed and [of] the hours attributable to those services.”
If the information the IRS wants isn’t available at the time, your odds of winning your rental property tax loss deductions are slim to none. Unfortunately, the logs can’t be created after the fact. Most everyone who spends the considerable time trying to do so using the IRS spreadsheets ends up losing the deductions.
If you’d like assistance creating this log so that you can be prepared in advance, give us a call at (732) 566-3660.