The first thing I thought when I read the opinion was:
this must have been a pro se case.
“Pro se”” has a specific meaning in Tax Court: it means
that a taxpayer is not represented by a professional. Technically, this is not
accurate, as I could accompany someone to Tax Court and they be considered pro
se, but the definition works well enough for our discussion.
There is a couple (the Sezonovs) who lived in Ohio.
The husband (Christian) owned an HVAC company and ran it as a one-man gang for
the tax years under discussion.
In April 2013 they bought rental property in Florida.
In November 2013 they bought a second. They were busy managing the properties:
· They
advertised and communicated with prospective renters.
· They
would clean between renters or arrange for someone to do so.
· They
hired contractors for repairs to the second property.
· They
filed a lawsuit against the second condo association over a boat slip that
should have been transferred with the property.
One thing they did not do was to keep a
contemporaneous log of what they did and when they did it. Mind you, tax law
does not require you to write it down immediately, but it does want you to make
a record within a reasonable period. The Court tends to be cynical when someone
creates the log years after the fact.
The case involves the Sezonovs trying to deduct rental
losses. There are two general ways you can coax a deductible real estate rental
loss onto your return:
(1) Your
income is between a certain range, and you actively participate in the
property. The band is between $1 and $150,000 for marrieds, and the Code will
allow one to deduct up to $25 grand. The $25 grand evaporates as income climbs
from $100 grand to $150 grand.
(2) One is a real estate professional.
Now, one does not need to be a full-time broker or
agent to qualify as a real estate professional for tax purposes. In fact, one
can have another job and get there, but it probably won’t be easy.
Here is what the Code wants:
· More
than one-half of a person’s working hours for the year occur in real estate trades
or businesses; and
· That
person must rack-up at least 750 hours of work in all real estate trades or
businesses.
Generally speaking, much of the litigation in this
area has to do with the first requirement. It is difficult (but not impossible)
to get to more-than-half if one is working outside the real estate industry
itself. It would be near impossible for me to get there as a practicing tax
CPA, for example.
One more thing: one person in the marriage must meet
both of the above tests. There is no sharing.
The Sezonovs were litigating their 2013 and 2014 tax
years.
First order of business: the logs.
Which Francine created in 2019 and 2020.
Here is what Francine produced:
Christian Francine
2013
hours 405 476
2014
hours 26 80
Wow.
They never should have gone to Court.
They could not meet one of the first two rules: at least
750 hours.
From everything they did, however, it appears to me
that they would have been actively participating in the Florida activities. This
is a step down from “materially participating” as a real estate pro, but it is
something. Active participation would have qualified them for that $25-grand-but-phases-out
tax break if their income was less than $150 grand. The fact that they went to
Court tells me that their income was higher than that.
So, they tried to qualify through the second door: as
a real estate professional.
They could not do it.
And I have an opinion derived from over three decades
in the profession: the Court would not have allowed real estate pro status even
if the Sezonovs had cleared the 750-hour requirement.
Why?
Because the Court would have been cynical about a contemporaneous
log for 2013 and 2014 created in 2019 and 2020. The Court did not pursue the
point because the Sezonovs never got past the first hurdle.
Our case this time was Sezonov v Commissioner.
T.C. Memo 2022-40.
