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Proprietor of a Residential Glass Business Failed to Establish He Was a Real Estate Professional. (Parker Tax Publishing November 25, 2014)

The rental real estate activities of a taxpayer who failed to properly document that he was a real estate professional were treated as passive activities. The taxpayer's failure to keep records of time spent on specific activities that could be considered "construction" or "reconstruction" in his residential glass business proved fatal to his bid to claim real estate professional status. Cantor v. Comm'r, T.C. Summary Opinion 2014-103 (11/06/14).

Howard Cantor was the owner of ABS Glass, a sole proprietorship in the business of providing glazing services involving repairs and/or installation of automobile windshields and windows and repairs and/or installation of glass and glass products in buildings. ABS Glass was divided into an "automotive" division and a "residential" division.

Cantor was more actively involved with the residential division, which offered various services, including the repair and installation of glass for shower and bathtub enclosures, windows, shelving, table tops, mirrors, and cabinets. Cantor did not maintain any form of contemporaneous log in which he recorded the time spent on the various activities within the residential division, although he clearly spent more than 750 hours per year providing services in connection with the division.

In addition to his ABC Glass activities, Cantor also owned (with his wife) four rental properties for which he reported net rental real estate losses in 2007 and 2008. The IRS disallowed losses after determining that Cantor did not meet the requirements of Code Sec. 469(c)(7) and, therefore, the rental activities were considered passive activities subject to the passive activity loss limitation rules.

Under Code Sec. 469, taxpayers are generally precluded from deducting passive activity losses, including losses from rental activity. However, a taxpayer who is a "real estate professional" within the meaning of Code Sec. 469(c)(7) can deduct rental activity losses. A taxpayer is a real estate professional under Code Sec. 469(c)(7)(B) for a tax year if:

(1) more than one-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.

The sole issue before the Tax Court was whether Cantor qualified as a real estate professional. Cantor argued that the services he performed in connection with the residential division of ABS Glass were "construction" or "reconstruction" activities that qualified the residential division of ABS Glass as a real property trade or business under Code Sec. 469(c)(7)(C) for both years at issue.

The Tax Court held that Cantor did not qualify as a real estate professional. The court noted that while some services Cantor performed (such as installing windows) would be considered construction or reconstruction, many other services (such as cutting and installing mirrors) would not. As Cantor did not keep contemporaneous logs showing how much of his time was spent on any particular activity, it was impossible to compare the time he spent in real property trade or business with time spent in other trades or businesses, as required by Code Sec. 469(c)(7)(B). Thus, Cantor was not an individual described in Code Sec. 469(c)(7) for either of the years at issue, and the IRS properly disallowed deductions for rental activity losses.

For a discussion of the deductibility of rental losses, see Parker Tax ¶ 247,105. (Staff Editor Parker Tax Publishing)

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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