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Let a Boston Tax Attorney Help You With Your IRS Real Estate Audit

Asset Forfeitures / IRS Audits

Posted on June 26, 2019 |

Real estate investing is a common investment vehicle that can be quite profitable. In the past, even money-losing investment properties were advantageous for U.S. tax purposes. However, current U.S. tax law seeks to limit the use of real estate investments as tax shelters. Unless a taxpayer is designated as a real estate professional, the amount of losses that can be claimed on rental property is now sharply limited.

Two common issues in IRS audits  are real estate losses and the real estate professional designation. Since real estate losses account for so much tax revenue, the IRS often sees real estate audits as easy “wins” to be pursued aggressively.

Massachusetts taxpayers facing an IRS real estate audit need an experienced Boston tax attorney to handle audits, appeals, and depending on the severity of the audit, potentially litigation. Top-notch Boston tax attorney Kevin E. Thorn has helped hundreds of taxpayers with their real estate audits.

Claiming Losses on Real Estate

Before the Tax Reform Act of 1986, U.S. taxpayers could offset losses on rental real estate from any of their income, including wages. The 1986 law changed this by making losses from “passive activity”, which included rental activity, only deductible from other passive income.

The IRS does allow a limited deduction for rental property losses. This deduction is for $25,000 up to a gross income level of $100,000. The deduction amount is reduced on a sliding scale up to $150,000, and not available at all above that amount.

American tax law recognizes an exception to this limitation for taxpayers actually working in the real estate industry, such as developers. This exception is the designation of taxpayers as real estate professionals. And  Boston tax attorney Kevin Thorn can help a taxpayer use this designation.

Real Estate Professional Designation

For taxpayers designated as real estate professionals, they can deduct all their real estate losses no matter their income level.  To use this designation, the taxpayer must meet the following criteria:

  • Qualify as a Real Estate Professional: To qualify, the taxpayer must work in a real estate trade or business. This includes development, construction, and rental.
  • 750 Hour Minimum: The taxpayer must work at least 750 hours in the real estate trade or business over the course of the tax year.
  • Majority of Working Hours as Real Estate Professional: The taxpayer’s real estate professional working hours must amount to more than half of his or her total working hours.

Real Estate Losses, the Real Estate Professional Designation, and IRS Audits

While the real estate professional designation is very helpful for those in the real estate business, it allows for ambiguity. The IRS tends to use audits to review passive activity losses, and this is especially true with the real estate professional designation.

The IRS has many tools for pursuing real estate audits. They may demand proof of hours worked and other qualifications for the real estate professional designation. Or the IRS can seek to exclude work hours dedicated to investor or management activities. The best chance for dealing with the situation is to seek the assistance of a Boston tax attorney who is well-versed in IRS real estate audits.

Speak With  Boston Tax Attorney Kevin E. Thorn About Your IRS Real Estate Audit

If you are facing an IRS real estate audit, contact an experienced Boston tax lawyer at the Thorn Law Group today. To schedule a consultation, contact Kevin E. Thorn, Managing Partner, at ket@thornlawgroup.com or (617) 692-2989.


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