Tax Law Test for Real Estate Professionals

Tax Law Test for Real Estate Professionals Generally, investors in activities such as real estate in which they don’t materially participate can only take deductions up to the amount of their passive income for the year. The IRS often scrutinizes large deductions for rental real estate losses claimed by so-called “real estate professionals.” In a new case involving a couple that wholly owned a partnership, Dunn, TC Memo 2022-112, 11/29/22, the Tax Court denied losses because neither spouse met the requisite tax law test. Generally, investors in activities such as real estate in which they don’t materially participate can only take deductions up to the amount of their passive income for the year. Thus, they can’t claim any annual passive activity loses (PALs), although there’s a limited PAL write-off for real estate investors qualifying as “active participants.” Normally, you can use up to $25,000 of loss to offset non-passive income if you are an active participant. But the $25,000 offset is phased out for a modified adjusted gross income (MAGI) between $100,000 and $150,000 of MAGI. Note: This phase-out provision is not indexed for inflation. However, if your real estate activities rise to the level of being a real estate professional, you can deduct a loss against non-passive income, just like any other business. There are two key requirements for qualifying as a real estate pro. 1. More than half of the personal services you perform in all trades or businesses during the tax year are performed in real property trades or businesses in which you materially participate. 2. You must spend more than 750 hours on your real property trades or businesses. As long as you satisfy this two-part test, real estate activities in which you materially participate aren’t treated as passive activities. But the IRS sticks to the strict letter of the law. Facts of the new case: A married couple, residents of Georgia, formed a partnership to manage heir real estate properties. Each spouse had a full-time job during the tax years in question. The couple filed joint tax returns for 2013 and 2014. They reported losses of $85,260 and $48,740, respectively, relating to the real estate properties subject to the PAL rules. The couple produced logs purportedly show their collective rental real estate activities during that time. The logs show 767 hours worked in 2013 and 407 hours worked in 2014. However, the logs didn’t specify which spouse worked these hours. In addition, the Tax Court said that the hours recorded in the logs were inflated to include hours spent physically present at the properties. Does either spouse qualify under the test for real estate professionals? The Tax Court examined the facts. First, the couple contended that they both spent more than one-half of the personal services they performed in a trade or business in real property trades or business. But the Tax Court disagreed. The evidence didn’t support this conclusion. Second, the couple further argued that they met the 750-hour requirement. To meet this requirement, only one spouse needs to have reached the 750-hour mark. But the Court wasn’t convinced that either spouse satisfied this burden. Accordingly, the Tax Court ruled that the test for real estate professionals wasn’t met. Taxes Internal Revenue Service (IRS) Article Income Taxes real estate taxes

IRS Delays $600 reporting on 1099-K forms for 1 year

IRS delays Form 1099-K $600 reporting threshold December 23, 2022 RELATED December 21, 2022 2023 brings lots of new to the IRS while keeping one problem: backlogs December 15, 2022 The AICPA’s tax policy and advocacy work: 2022 highlights December 12, 2022 Final regs. issued on centralized partnership audit regime TOPICS Tax IRS Practice & Procedure The IRS on Friday announced a delay in the $600 reporting threshold for third-party settlement organizations, which had been in effect for the 2022 calendar year. As a result, the IRS says third-party settlement organizations will not have to report tax year 2022 transactions on a Form 1099-K, Payment Card and Third Party Network Transactions, to the IRS or the payee for the lower, $600 threshold amount that was enacted as part of the American Rescue Plan Act (ARPA) of 2021, P.L. 117-2. Until the changes enacted by ARPA, third-party settlement organizations were allowed a de minimis exception to filing Form 1099-K with respect to payees with 200 or fewer such transactions during the calendar year with an aggregate gross amount of $20,000 or less. ARPA amended this de minimis amount to $600, with no minimum number of transactions, effective for calendar years beginning after Dec. 31, 2021. Third-party settlement organizations generally include banks or other organizations that process credit card transactions on behalf of a merchant and make an interbank transfer of funds to the merchant from a customer. Form 1099-K must be furnished to the participating payees on or before Jan. 31 of the year following the calendar year for which the return was made and must be filed with the IRS on or before Feb. 28 (March 31 if filing electronically) of the year following the calendar year for which the return was made. The new $600 minimum has been subject to widespread criticism. Last week, the AICPA sent a letter to the chairs and ranking members of the Senate Finance and House Ways and Means Committees, expressing "deep concerns" about the implementation of the $600 reporting threshold. In that letter, sent by Jan Lewis, CPA, chair of the AICPA Tax Executive Committee, the AICPA warned that the lower threshold would "lead to significant confusion in the tax system in the next several months." The AICPA also was concerned that an IRS matching program for 2022 Forms 1099-K could "result in significant taxpayer misunderstanding, and also lead to a growth in the IRS correspondence and processing backlog." Therefore, in Notice 2023-10, the IRS announced that it will regard calendar year 2022 as a "transition period" for purposes of IRS enforcement and administration of the $600 de minimis exception for third-party settlement organizations and third-party network transactions as provided in the notice. This means that for returns for calendar years before 2023, a third-party settlement organization is not required to report payments in settlement of third-party network transactions with respect to a participating payee unless the gross amount of aggregate payments to be reported exceeds $20,000 and the number of such transactions with that participating payee exceeds 200. The IRS says that for years after 2022, it will enforce the $600 de minimis reporting threshold. The AICPA, according to Ed Karl, CPA, CGMA, vice president–Tax Policy & Advocacy, continues to call on Congress to raise the $600 de minimis exception for reporting by instituting a cost-of-living adjustment (COLA) using 1954 as the base period for the COLA.\ Information gathered by Nevine, J.D.

2022 Capital Gains Rates

2022 Long-Term Capital Gains Tax Rates Tax filing status 0% rate 15% rate 20% rate Single Taxable income of up to $41,675 $41,676 to $459,750 Over $459,750 Married filing jointly Taxable income of up to $83,350 $83,351 to $517,200 Over $517,200 Married filing separately Taxable income of up to $41,675 $41,676 to $459,750 Over $459,750 Head of household Taxable income of up to $55,800 $55,801 to $488,500 Over $488,500

IRS Delays $600 1099-K reporting requirement

IRS delays Form 1099-K $600 reporting threshold By Alistair M. Nevius, J.D. December 23, 2022 RELATED December 21, 2022 2023 brings lots of new to the IRS while keeping one problem: backlogs December 15, 2022 The AICPA’s tax policy and advocacy work: 2022 highlights December 12, 2022 Final regs. issued on centralized partnership audit regime TOPICS Tax IRS Practice & Procedure The IRS on Friday announced a delay in the $600 reporting threshold for third-party settlement organizations, which had been in effect for the 2022 calendar year. As a result, the IRS says third-party settlement organizations will not have to report tax year 2022 transactions on a Form 1099-K, Payment Card and Third Party Network Transactions, to the IRS or the payee for the lower, $600 threshold amount that was enacted as part of the American Rescue Plan Act (ARPA) of 2021, P.L. 117-2. Until the changes enacted by ARPA, third-party settlement organizations were allowed a de minimis exception to filing Form 1099-K with respect to payees with 200 or fewer such transactions during the calendar year with an aggregate gross amount of $20,000 or less. ARPA amended this de minimis amount to $600, with no minimum number of transactions, effective for calendar years beginning after Dec. 31, 2021. Third-party settlement organizations generally include banks or other organizations that process credit card transactions on behalf of a merchant and make an interbank transfer of funds to the merchant from a customer. Form 1099-K must be furnished to the participating payees on or before Jan. 31 of the year following the calendar year for which the return was made and must be filed with the IRS on or before Feb. 28 (March 31 if filing electronically) of the year following the calendar year for which the return was made. The new $600 minimum has been subject to widespread criticism. Last week, the AICPA sent a letter to the chairs and ranking members of the Senate Finance and House Ways and Means Committees, expressing "deep concerns" about the implementation of the $600 reporting threshold. In that letter, sent by Jan Lewis, CPA, chair of the AICPA Tax Executive Committee, the AICPA warned that the lower threshold would "lead to significant confusion in the tax system in the next several months." The AICPA also was concerned that an IRS matching program for 2022 Forms 1099-K could "result in significant taxpayer misunderstanding, and also lead to a growth in the IRS correspondence and processing backlog." Therefore, in Notice 2023-10, the IRS announced that it will regard calendar year 2022 as a "transition period" for purposes of IRS enforcement and administration of the $600 de minimis exception for third-party settlement organizations and third-party network transactions as provided in the notice. This means that for returns for calendar years before 2023, a third-party settlement organization is not required to report payments in settlement of third-party network transactions with respect to a participating payee unless the gross amount of aggregate payments to be reported exceeds $20,000 and the number of such transactions with that participating payee exceeds 200. The IRS says that for years after 2022, it will enforce the $600 de minimis reporting threshold. The AICPA, according to Ed Karl, CPA, CGMA, vice president–Tax Policy & Advocacy, continues to call on Congress to raise the $600 de minimis exception for reporting by instituting a cost-of-living adjustment (COLA) using 1954 as the base period for the COLA. In the letter to Congress, the AICPA also said it supports a recommendation by the National Taxpayers Union Foundation to raise the threshold to $5,000.

Republican House trying to Roll back IRS funding boost

87,000 new IRS employees at a cost of $80 billion, not if Representative McCarthy can remove this from the Climate and Health Care Package. McCarthy has said if he becomes Speaker he will push the reduction of this $80 billion piece of the Climate bill.