Real Est. Professional amend prior yr. question

[jeff501]

I have a client who just got audited. The only source of income is through three rental properties they own. They incurred substantial losses in 2006 but the auditor's position is they are not real estate professionals and the $25,000 limitation applies and the IRS wants around $3,600 in taxes, penalties, interest. To complicate matters, my client won $117,000 in a lottery in 2006 which limits their losses on the real estate.

My question: can my client amend 2006 and retroactively elect to treat all interests in rental real estate as a single activity? In TTB it states in section 7-13 that the taxpayer must file a statement with the original tax return. From the TTB it looks like they may be out of luck but didn't know if anyone had any ideas as how to deal with this.

[joanmcq]

If their only source of income is three RE properties with huge losses, may I ask what they are living on?

[solomon]

My question: can my client amend 2006 and retroactively elect to treat all interests in rental real estate as a single activity? In TTB it states in section 7-13 that the taxpayer must file a statement with the original tax return. From the TTB it looks like they may be out of luck but didn't know if anyone had any ideas as how to deal with this.

In the case of Richard and Jane May vs the Commissioner, the Court ruled in favor of the Respondent. The Petitioner's argument was that he had a "deemed" election. The Court did not buy it because he did not file a statement with the original return. He would have had adequate material participation if he was permitted to group the rentals.

On the other hand, I have a friend that represented someone in a similar situation. On examination he lost but he won when going to appeals.

[newbie]

If their only source of income is three RE properties with huge losses, may I ask what they are living on?

Off their winnings?

[abby]

question

Can they show 750 hours spent on the three rentals for the year? That's averages just under 15 hours per week.

That bar needs to be hurdled before the question of aggregation would apply.

[jeff501]

Appreciate the above responses. Yes they spend 750 hours per year with their real estate activities. They have three houses plus are restoring another one. They have been living on lottery winnings plus the husband took his 401K out a year before I started doing his taxes.

I am going to try to see if amending 2006 and taking the election flies with the auditor. Otherwise, they're looking at $3,600 in taxes, penalty, interest. I've had dealings with this auditor in the past and she always treats the taxpayer fairly. But she has to answer to her superiors so she can only allow so much which is understandable.