Suppose you dabble in rental real estate activities but intend to spend more time and effort on the operations. This typically provides tax benefits and could even result in a deductible loss on your return. However, as evidenced by a new case, Mirch TC Memo 2025-128, 12/11/25, the tax outcome often depends on whether you qualify as a real estate professional. It’s not enough to just tell the IRS you’re “going pro.”
Background: Generally, investors in activities such as real estate in which they do not materially participate can only deduct up to the amount of their “passive income” for the year. Thus, they can’t claim annual losses (although there’s a limited write-off of up to $25,000 allowed for certain real estate investors).
However, if your real estate activities rise to the level of being a real estate professional, you can deduct a loss against highly-taxed non-passive income, just like any other business. There are two key requirements for qualifying as a real estate professional.
- More than half of the personal services performed in all trades or businesses during the tax year must be performed in real property trades or businesses in which you “materially participate.”
- You must spend more than 750 hours on your real property trades or businesses.
If you satisfy both parts of this two-part test, real estate activities in which you materially participate aren’t treated as passive activities. But you must be able to prove that you put in the time.
New case: A married couple, residents of California, were both attorneys, although the husband reduced his workload after a stroke. They owned two rental properties. One, in Providence, Rhode Island, was near Brown University where their daughter attended school. The other was in Reno, Nevada.
During 2006, the couple rented the Providence property to college students and their daughter lived there rent-free. They paid their daughter $500 a month to manage the property. At trial they produced a chart estimating that the wife performed 259 hours of personal service on the activity and 57 hours for the husband, totaling 316 hours. They didn’t produce any log for their daughter’s hours.
The Reno property was a single-family home. It was rented for a week or less about 23 times for a total of 93 days during 2006. The couple produced a log that estimated that the wife worked 944.5 service hours on the Reno property using a standardized method for each of the following tasks:
- 12 minutes to read an email and 12 minutes to send an email regardless of the length of the emails for a total of 7.4 hours;
- Seven hours to clean the property after each stay regardless of the length of the stay (which ranged from one to 14 days) for a total of 168 hours; and
- Eight hours of site management and maintenance for each day the property was rented (93 days) for a total of 744.5 hours.
The Tax Court questioned the methodology for calculating the time spent on the two rental activities. In the end, it determined that neither the time requirements for a short-term rental or a long-term rental were met.
Moral of the story: This a high bar to clear for taxpayers with other full-time jobs. Keep detailed and accurate records to prove your status as a professional.
Sign in to get access to this free resource, and all of our whitepapers and reports.
Download this content today!
Register Now Already registered? Click here to Log In
Tags: home sales, Income Taxes, IRS, real estate, real estate income, rental income, rentals, Taxes
