What are some of the IRS tricks to deny my real estate professional designation?
The IRS asks auditors to consider several indicators which suggest the taxpayer did not materially participate. Some of the issues are-
Location: The distance between you and your rentals can suggest how much participation could be performed. Naturally, the further the distance the more unlikely a real estate professional could materially participate according to IRS guidelines. While this is not a hard and fast deal-killer, it must be mitigated during an audit.
Other Activities: You have a W-2 wage job requiring full-time hours for which you receive significant compensation. Or, you have numerous other investments, rentals, business activities, or hobbies that absorb significant amounts of time.
Third Parties: There is paid on-site management, foreman, supervisor and / or employees who provide day-to-day oversight and care of the operations, including property management companies.
Impact: The majority of the hours claimed are for work that does not materially impact operations. Or, would business operations continue uninterrupted if you did not perform the services claimed.
Health: The taxpayer is elderly or has health issues.
This does not mean you will instantly be denied if you meet one of the above indicators. We suggest using it as way to use the IRS language along with your defense. For example, you need to argue “that business operations would be severely impacted if I stopped performing my real estate activities.” Or, “While I use a property management company, they are only used to collect monthly rent and periodic maintenance. I perform the day to day operations of advertising, accounting, reviewing financials, ensuring safety and law compliance, etc.”