Discussion:Real Estate Professional material participation audit

I have a client that is a real estate agent with a rental property trying to claim rental expenses during an IRS audit. The examiner is trying to deny the expenses and reduced the rental loss down to passive losses. I am aware that real estate professional losses are not limited if you meet all requirements. She is trying to deny the cost based on the 500 hour material participation rule. She claims because I can not prove he worked on the rental for over 500 hours the deduction is denied. I prepared the return using turbo tax and answered all questions accordingly. I have also researched the material participation definition which is very gray.

1. He spent more than 750 hours a year actively involved in real estate, he had over 2500 hours, and have been assisting people with selling, leasing and buying real estate for over 5 fives years. 2. He has spend more than 50% of my work related time involved in real estate. 3. Next screen, I clicked on the material participation tab and read the description. based on the questions,He can qualify for number 6 material participating in a personal service for the last three years under a real estate and consultant label. He can also meet number 2, He is the only person who substantially participates in the activity. By Turbo Tax calculations, He should only have to meet 1 of these requirements to be a real estate professional.

The auditor is trying to deny all of the rental loss based only on meeting the 500 hours of participated activity.

Can anyone tell me, why the auditor is taking this position and if turbo tax definition of material participated is correct and what can I say to prove the auditor wrong.

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esp. this part: You are not licensed or permitted to use the Software, or allow the Software to be used, to prepare tax returns, schedules or worksheets on a professional or commercial basis (i.e., for a preparer's or other fee). Additionally, you must indemnify and defend Intuit against any claims or lawsuits, including (without limitation) attorneys’ fees, that arise from or result from the use of the Software on a professional or commercial basis.

curious, did you sign the return for the client, or are you in the category of 'professional' that is above that?

TexCPA 20:37, 15 September 2009 (CDT)

Solomon's answer gives you the info you need. What did you learn from reading that document?

[ATG PAL]

TexCPA 12:02, 16 September 2009 (CDT)

client that is a real estate agent with a rental property trying to claim rental expenses during an IRS audit. The examiner is trying to deny the expenses and reduced the rental loss down to passive losses. I am aware that real estate professional losses are not limited if you meet all requirements. She is trying to deny the cost based on the 500 hour material participation rule. She claims because I can not prove he worked on the rental for over 500 hours the deduction is denied. I have also researched the material participation definition which is very gray.  
 
1. I spent more than 750 hours a year actively involved in real estate, he had over 2500 hours, and have been assisting people with selling, leasing and buying real estate for over 5 fives years. 2. I have spend more than 50% of my work related time involved in real estate. 3. Next screen, I clicked on the material participation tab and read the description. based on the questions,He can qualify for number 6 material participating in a personal service for the last three years under a real estate and consultant label. He can also meet number 2, He is the only person who substantially participates in the activity. I also pick up my rent, do all repairs and all management, along with being the sole owner of the property. 
 
The auditor is trying to deny all of the rental loss based only on meeting the 500 hours of participated activity.  
 

'Part 2': The auditor did not admit to the error, however changed their opinion on denying my real estate professional qualification due to material participation. Now, is going to deny me based on not being a broker and only being listed as a sales agent per CA license. I explained I perform all duties as an agent for my broker (1) Selling, exchanging, purchasing, renting or leasing real property; (2) offering to do these activities; (3) negotiating the terms of a real estate contract; (4) listing of real property for sale, lease or exchange; or (5) procuring prospective sellers, purchasers, lessors or lessees. They asked me to prove it. They want to deny me and insist that I appeal. I also asked to come in and explain the situation, they refused to let me. I would love to clear this up before going to appeal and wasting more time and effort. I am going to provide a listing agreement, rental agreement, purchase contract etc., along with definitions for real estate broker and agents in the state of CA. I have already provided a day to day calendar of all of my business miles with details of my activities by day, month and total year. Brokerage is very vague in the IRS code and do not state you have to be a license Broker, I believe the term is brokerage. Per that term I perform all duties that a broker would consider to do in the State of CA. I know their have been a ruling on this subject, and the client won, however I may not be able to use it because it is at the state level.  
 
Can anyone offer a suggestion to slam dunk this audit.