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Tax Byte

A Reminder of Real Estate Professional Status Requirements (Warren v. Comm. (T.C. Summary Opinion 2024-20))

James Michael Warren purchased a single-family home in 2016 with plans to convert it into an assisted living facility. Throughout 2017, he renovated the property while employed full-time as an engineer at Lockheed Martin. Though some rooms remained habitable during renovation, generating $6,000 in rental income (which Warren failed to report), he claimed a $41,733 loss deduction on his Schedule E.

The Taxpayer Flunked the Time Test:

The IRS disallowed Warren’s claimed losses, determining he didn’t qualify as a real estate professional under Section 469(c)(7). The Tax Court agreed, highlighting two critical points:

First, to qualify as a real estate professional, a taxpayer must spend more than half of their personal service hours in real property trades or businesses. Warren worked 1,913 hours at Lockheed Martin in 2017. Even accepting his highest estimate of 1,628 hours spent on the rental property (from a log created the night before trial), he clearly failed this first test.

Note. That is a total of 3,531 hours Warren claimed he worked during the year under audit — 68 hours a week for 52 weeks of the year. Warren has the stamina to work tax season.

Second, the court noted that contemporaneous time logs are not strictly required, but “postevent ballpark guestimates” are insufficient. Warren’s hastily prepared logs, with many hours unsupported by documentation, undermined his position.

Tax Planning for Tax Practitioners:

  1. Advise clients to maintain contemporaneous, detailed records of time spent on rental activities – especially if they have a “j-o-b”
  2. Remember that employee and self-employment hours count as personal services in a trade or business for purposes of the more than 50% test
  3. Ensure clients report all rental income, even during renovation periods

For clients striving to qualify as real estate professionals, careful planning and meticulous documentation are essential. The Warren case demonstrates the Tax Court’s continued strict adherence to the statutory requirements of Section 469.