Another Real Estate Investor Denied his Deductions – How to Avoid a Similiar Fate

asset protectionThe Tax Court denies another real estate investor deductions for his business expenses.   Why?  It is quite simple; the investor failed to show that he intended to realize a profit and that he was engaged in a trade or business.

Business expenses are generally governed under Section 162(a), which allows a taxpayer to deduct all ordinary and necessary business expenses paid or incurred during the taxable year.  This of course assumes that a person is engaged in a trade or business that will give rise to deductible expenses.  Generally, the court will look at a person’s activity and make a determination if the proposed business venture, giving rise to the expenses, is engaged with continuity and regularity and with the primary purpose of realizing a profit.

In Mobasher v. C.I.R., the Tax Court found that Mr. Mobasher’s real estate activity over the years 2004 – 2007 was not sufficient to allow him to deduct over $29,000 in expenses associated with his investing.  Mr. Mobasher attempted to refute the IRS’s position by presenting evidence that he spent 10 hours a week on real estate activities.  Unfortunately, that alone was not enough to persuade the Tax Court he was engaged in investing with the intent to make a profit.  What makes this case interesting is it appears to have come down to documentation.  Mr. Mobasher did a terrible job of keeping records of his activities and did not formalize his investing.

To substantiate your business activity in an audit you must have some objective evidence for the court to look at to reach a favorable determination.  Merely stating “I was engaged in investing with the intent to make a profit” will not carry the day.  What are you doing to back up your intent?  Here is a partial list of items that you should consider if you are serious about your investing and would like to write off your expenses:

  • Formalize your business by incorporating (this shows intent)
  • Create a formal business plan (check out our real estate inventor’s business plan in the Platinum area of our web site or have us create a custom plan for you)
  • Have business cards printed up with your business name and position
  • Create a separate bank account for your business
  • Document your investing activity even it means only performing research i.e., day, time spent, what you looked at, etc..
  • Minutes of meetings detailing what was discussed and who was present

As the IRS becomes more aggressive in its pursuit of tax revenue, your actions are your best defense. 

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