Tax Court Rules One Taxpayer's Activity Was Too 'Passive'

The U.S. Tax Court held on July 16th that taxpayer Guillermo Merino Jr. did not qualify as a real estate professional because of his lack of involvement with his properties. Merino was trying to claim losses on seven of his out-of-state properties located in Colorado and Nevada. Because he used a management company to perform all of the tasks associated with the Colorado property it was subject to the passive activity limitation under tax code Section 469. Merino also hired an assistant to handle the tasks associated with his six other properties in Nevada. As such, the Tax Court classified his lack of activity and involvement with each property as passive as defined in the tax code. It was Merino's burden to prove that he spent at least 750 hours during the 2007 tax year performing services in relation to his properties. It was also necessary to establish that these services accounted for over half the time he spent performing services in any trade or business. Because of his outsourcing in regards to managing the properties, collecting rent, etc., the Court held that Guillermo did not qualify as a real estate professional. Word to the wise: make sure you are putting in your allotted 750 hours!