The Tax Cuts and Jobs Act (TCJA) makes keeping a log of your professional real estate activities more important than ever. The TCJA includes new Internal Revenue Code section 199A that requires taxpayers to prove the amount of time they spend on qualified trades or businesses.
Like section 199A, Internal Revenue Code section 469 compels real estate professionals to maintain a log of their real estate activities. The treatment of a taxpayer's losses from rental real estate may be treated as passive or nonpassive, depending on the taxpayer's level of participation. Because losses from passive activities cannot be used to offset nonpassive income, taxpayers generally are interested in maximizing the number of business activities that qualify as nonpassive—that is, activities in which the taxpayer materially participates.
While there are several tests that must be met to treat losses from rental real estate as nonpassive, we offer a sample log designed to help taxpayers track whether or not they have met the hours tests for the participation classifications. The sample log includes a contemporaneous calendar to track daily hours by activity, as well as recommended documentation to support the activity.
Detailed, contemporaneous documentation of time devoted to each activity is necessary to support a taxpayer's position for treatment of rental real estate activity losses. Without this documentation, the IRS may not accept documentation created upon inquiry. Please consult your tax advisor regarding your specific facts and circumstances to determine the proper treatment of your rental real estate activity losses.
|Material Participation Hours Threshold:||500 hours - Rental|
|Real Estate Professional Hours Threshold:||750 hours and > 50% of total hours - Real Property Trade or Business|
|Examples of Qualifying Services Performed||Examples of Support for Qualifying Services Performed|
|Participated in the process of negotiating lease terms with prospective tenant(s)||Contemporaneously maintained Outlook or other calendar; LOI for lease, copies of executed leases|
|Review proposals and contracts for building services||Contemporaneously maintained Outlook or other calendar; proposals and contracts; email and other communications regarding the same|
|Negotiated terms related to obtaining financing for retail real estate project||Contemporaneously maintained Outlook or other calendar; lease term sheets, copies of executed loan documents|
|Analyzed and prepared financial data related to rental real estate acquisitions and dispositions||Contemporaneously maintained Outlook or other calendar; due diligence materials, purchase and sale agreements, business models, business plans|
We cannot overstate the importance of maintaining a contemporaneous record of time spent on all business activities. Reliance on after-the-fact documentation in an audit almost inevitably results in significant disallowed losses and additional tax liabilities.
If you have questions or would like more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.