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Failure to Spend 750 Hours on Rental Real Estate Activities Kills Deduction

(Parker Tax Publishing May 2022)

The Tax Court held that a husband and wife who rented out two properties in Florida could not deduct losses from their rental activities because neither spent the requisite 750 hours working on the rental properties for the two years at issue and thus did not qualify as real estate professionals under Code Sec. 469(c)(7). Accordingly, the court found that the couple's rental activities were passive activities, regardless of whether they materially participated in those activities. Sezonov v. Comm'r, T.C. Memo. 2022-40.


Christian Sezonov and Francine Sezonov jointly filed their 2013 and 2014 tax returns. During those years, Christian was the only member of Design Build Service, LLC (DBS), a single-member LLC through which he operated a wholesale HVAC business. Christian operated the HVAC business full time and with no employees throughout 2013 and 2014.

In 2013, DBS purchased two properties in Florida: a property on Reybell Lane in Palm Coast (Reybell property), and a property on Marina Bay Drive in Flagler Beach(Marina Bay property) (collectively, Florida rental properties). Through DBS, the Sezonovs rented out both properties during 2013 and 2014 while maintaining their primary residence in Ohio.

After DBS purchased the Reybell property, the Sezonovs leased the property to its previous owners until June 2013. When those tenants vacated the property, the Sezonovs cleaned and furnished the property to prepare it for future rentals. Once this work was completed, the Sezonovs leased the Reybell property to a tenant for a one-year term beginning September or October 2013. After DBS purchased the Marina Bay property, the Sezonovs hired contractors to make improvements and repairs to the property so that it could be leased as a short-term vacation rental. The Marina Bay property was first made available to rent in December 2013, and it was rented for the first time in January 2014. Most of the Marina Bay property leases were for one-month terms.

Francine advertised the Florida rental properties and communicated with renters and prospective renters via email. In between rentals, Francine would clean and prepare the Marina Bay property for its next renter or hire a cleaner to do so on her behalf. Christian assisted in responding to emails, as well as performing maintenance and repairs for the properties, but Francine was responsible for most of the day-to-day management. The Sezonovs did not maintain contemporaneous records of the hours that they worked on their Florida rental properties. However, in 2019 and 2020, Francine created time logs estimating the time that she and her husband had worked on the Florida rental properties in 2013 and 2014. The time estimates on the log showed that Francine worked on the rental properties for approximately 476 hours in 2013 and 80 hours in 2014, while Christian worked on the properties for 405 hours in 2013 and 26 hours in 2014.

The Sezonovs reported the income, expenses, and losses associated with the Florida rental properties on Schedules E, Supplemental Income and Loss, attached to their 2013 and 2014 federal income tax returns. The Sezonovs did not elect to aggregate their rental activities under Code Sec. 469(c)(7)(A). In 2017, the IRS issued a statutory notice of deficiency to the Sezonovs, disallowing the Schedule E loss deductions for 2013 and 2014. The Sezonovs took their case to the Tax Court.

Code Sec. 162 generally allows a taxpayer to deduct ordinary and necessary expenses paid or incurred in carrying on a trade or business. Special rules apply, however, to losses from passive activities. In the case of individual taxpayers, Code Sec. 469 disallows a deduction for a passive activity loss. Under Code Sec. 469(d)(1), a passive activity loss is the excess of the aggregate losses from all of the taxpayer's passive activities for the tax year over the aggregate income from all of his or her passive activities during the tax year. Code Sec. 469(c) defines a passive activity as (1) any trade or business in which the taxpayer does not materially participate or (2) any rental activity, regardless of whether the taxpayer materially participates in such activity.

Although Code Sec. 469(c)(2) generally treats all rental activity as passive, Code Sec. 469(c)(7) carves out an exception for the rental activities of certain taxpayers engaged in a real property trade or business, i.e., real estate professionals. If a taxpayer qualifies as a real estate professional, then the rental activity is treated under Code Sec. 469(c)(7)(A)(i) as a trade or business subject to the material participation requirements of Code Sec. 469(c)(1) rather than as per se passive. Code Sec. 469(c)(7)(B) provides that a taxpayer qualifies as a real estate professional for a given tax year if: (1) more than half of the personal services performed in trades or businesses by the taxpayer during the tax year are performed in real property trades or businesses in which the taxpayer materially participates, and (2) the taxpayer performs more than 750 hours of services during the tax year in real property trades or businesses in which the taxpayer materially participates. In the case of a joint return, these requirements are considered satisfied only if either spouse separately satisfies both requirements.

In assessing a taxpayer's material participation, each interest in rental real estate is treated as a discrete real estate activity unless the taxpayer elects under Code Sec. 469(c)(7)(A) to treat all such activities as a single activity. However, in determining whether the 750-hour requirement is satisfied, all of the taxpayer's real property trade or business activity is taken into account, regardless of whether the taxpayer has made an election to aggregate.

Reg. Sec. 1.469-5T(f)(4) provides that the extent of an individual's participation in an activity may be established by any "reasonable means." The regulation does not require the taxpayer to maintain contemporaneous daily time reports or similar documents if the taxpayer's participation can be established by other reasonable means. "Reasonable means" includes, but is 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."


The Tax Court agreed with the IRS that the Sezonovs were not entitled to deduct the losses from their rental activities in 2013 or 2014. First, the court found that the time logs prepared by Francine, which were the only documents in the record that described the personal services the Sezonovs performed and estimated the time spent performing those services, were often unclear about who worked which hours. The court also said that the time estimates appeared excessive in several respects.

However, the court went on to explain that even if it were to accept the time logs as credible and accurate, they were insufficient to prove that either of the Sezonovs qualified as a real estate professional within the meaning of Code Sec. 469(c)(7). The court noted that both Christian's and Francine's estimated hours fell well short of the 750 hours required to qualify them as real estate professionals in each of the years at issue. For 2013, the Sezonovs estimated that Francine spent less than 500 combined hours working on both Florida rental properties (including time spent travelling to and from the rental properties from her home in Ohio). For 2014, they estimated that she spent less than 100 hours working on the Florida rental properties. Likewise, the Sezonovs estimated that Christian spent less than 500 hours working on the Florida rental properties in 2013 and less than 50 hours in 2014. Additionally, the court found that Christian failed to satisfy the requirement of Code Sec. 469(c)(7)(B)(i) because he did not spend more time working in the real estate rental business than in his HVAC business in either year.

Because neither Christian nor Francine established that he or she met the 750-hour requirement for either year, the court concluded that neither qualified as a real estate professional under Code Sec. 469(c)(7) for 2013 or 2014. Accordingly, the court held that the Florida real estate rental activities in 2013 and 2014 were passive activities, regardless of whether the Sezonovs materially participated in those activities.

For a discussion of the rules for deducting rental losses, see Parker Tax ¶247,120.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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