Real Estate Professionals will save income taxes with proper documentation!

Real Estate Professional or not? How to protect you against IRS audit! By By Jeffrey Brooks, CPA, CFP, MBA for JBrooks Wealth Advisors, PC, a Professional CPA and CFP Firm 602-292-2009 Please consult with your professional tax CPA regarding your specific circumstances!

I will not use their real names because of confidentiality issues.

Mary Jones is lawyer and real estate professional. Moses, her husband, is a busy entrepreneur that owns 6 businesses. Together their adjusted gross income is over $250,000.

Mary helps her dad who runs a successful law practice. Mary keeps track of her time through timesheets and will spend 673 hours working for her dad.

Mary and Moses will owe $19, 000 if their 6 real estate projects are considered passive.

Mary passed her real estate licensing test a year ago and is licensed.

When Mary told me that she passed the test, I recommended she consider becoming a real estate professional so she and Moses could write off the losses.

Mary asked me what she needed to do and I gave her a list of requirements to keep in writing:

1. Keep track of her law firm hours.
2. Keep track of her real estate hours (excluding studying for the test)
3. Spend more hours in real estate activity on an annual basis than in working in the field of law.
4. Spend over 750 hours per year in real estate activities.

Mary asked me what activities are considered real estate activities:

1. Acquisition
2. Construction
3. Conversion
4. Development which would include meeting with professionals to discuss and implement property development. Meeting with legal and accounting professionals, real estate professionals, architects, engineers and other professionals directly related to real estate would all count!
5. Operation
6. Management
7. Rental

Even if Mary does not have a real estate license, she can still qualify as a real estate professional by documenting that she invested more than 750 hours in real estate activities and spent more in real estate than law.

Now let us take a look at how much the Winners saved by proving that they were real estate professionals: If the Winners are not real estate professionals they owe over $80K plus high estimated taxes!
But if the Winners are real estate professionals there total tax decreases to $68,000 plus lower estimated taxes.

The IRS says that you can establish your participation in an activity by any reasonable means.

In this context, the IRS says that other reasonable means may include “but are not limited to the identification of services performed over a period of time and the approximate number of hours spent performing such services during such period, based on appointment books, calendars, or narrative summaries.”

Remember, the courts have consistently ruled against taxpayers who arrive in court without proof of time spent. Several cases are the Peter Ackerman case and the Barry Scheiner case. Both cases failed to give the taxpayer the win because of a lack of written documentation!

Our Recommendation is to keep a written record on a timely manner within one week of the time spent!

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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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JBrooks Wealth Advisors, PC.

Certified Public Accountant
Address: 4647 N 32nd Street, Suite B245
Phoenix, Arizona 85018
Phone: 602-292-2009