#22: Rulings & Real Estate: Unpacking Two Critical 2024 Tax Court Cases

Real Estate Is Taxing

Join me as I dive into two real estate focused Tax Court cases from summer of 2024. There's always something interesting to be learned when it comes to court cases.

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TC Summary 2024-17

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[00:00:00] Welcome to Real Estate is Taxing, where we talk about all things real estate tax, and break down complex concepts into understandable, entertaining tax topics. My name is Natalie Kolodij, I'm your host, and I am so excited that you've decided to join me.

[00:00:23] Hello. Hello everyone. Welcome to this week's episode. This summer has been a pretty good summer for tax court cases. And what I mean is that there have just been several that I specifically have enjoyed and thought were interesting. And that's because there have been a handful that relate to real estate.

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[00:00:46] Now I love anything court related. I love reading true crime books. I love listening to the podcast. So for me, Reading tax court cases is extra exciting. But even [00:01:00] if you do not find that as cool as I do. These are still something that you should hold at least a little bit of interest in. The tax code itself is very rarely black and white.

[00:01:12] There's a lot of room for interpretation. There's a whole lot of guidance and nuance that happens after the code is written. And the tax court results are really just one of those pieces of guidance. Reading these court cases. Really does give us fantastic insight to the way the courts have been leaning on some of these topics that are in that gray area. And when it comes to real estate, there's plenty of gray area that we love playing in with the tax code. So getting these more recent kind of thoughts from the tax court. Getting this feedback, seeing how they're viewing things.

[00:01:55] This is invaluable. What I have for you guys today. [00:02:00] Is two court cases that are both tax court summary opinions from this summer. So these are super recent from July and August. And both are related to real estate.

[00:02:11] The first case that I want to walk you guys through is from last month, this came out August 20, 24. This is TC summary, 2024 dash 17. Eason V commissioner. So this case was interesting because it deals with a topic that comes up pretty frequently when it comes to real estate in two different capacities. The first one being, if you pay for one of those 40, 50, $60,000 real estate guru courses, is it deductible?

[00:02:45] And when is, or isn't it. And the other part of the question being, if you are new in real estate. When does your business actually begin? When are you open for business where you can start writing [00:03:00] off? All of your costs that are incurred. So those were the two big questions that came up in this case.

[00:03:08] So this summary opinion relates to a couple who owned two rentals in 2016. One of them, they maintained as a rental. The second rental property they had sold by June of 2016. So at this point, they've got a little bit of real estate experience. They just actively got rid of half of their real estate business that existed, so to speak.

[00:03:33] So they've got one rental left.

[00:03:35] That same year. The taxpayer in this case. Lost his job. Close to the beginning of the year, the taxpayer lost his job. And the couple started looking into other ways they could supplement their income and other opportunities to help make up. For that last paycheck, they were used to getting. And one of the things they came across was real estate investing. So [00:04:00] they were already a little bit familiar with it and they had some experience with rentals, but they stumbled across an ad for a real estate course or courses that you could take. That would teach you how to invest presumably. In some capacity. The court case does not go into the details. Of exactly what was covered in that course or those courses. But what it does say is that the taxpayer and the spouse decided to invest in this And they spend $41,934 on two different courses from this same real estate. Uh, quote, education provider. So once they bought these courses, The couple, then went on to set up an S corporation. So they established an S Corp in July of 2016. And they got some business cards. They got some custom branded stationary. [00:05:00] But outside of that, Nothing else really happened. So there was no additional purchases of real estate. There were no proven efforts at marketing. For a real estate.

[00:05:14] There was no proven efforts at advertising that they were in the market to buy real estate. Really not a whole lot else happened after they set up this S corporation and bought some business cards. Also worth noting. Is that by 2018. So within a year and a half from when they purchased these large expensive courses. The company through whom they had bought the courses. Went out of business. So another piece to this specific case that was taken into account by the tax court. Was the fact that this couple did anticipate having this ongoing support and resources. And all of this training and the moon and the sun and [00:06:00] everything else gurus promise you when you give them $40,000. And by 2018. None of it was there.

[00:06:07] It had all disappeared. The company went under and they were now on their own.

[00:06:12] So the year in question. For this couple's court case is 2016. So 2016 is the year when, as a recap, they had one rental property. They had sold off their other rental. Husband lost his job and they paid 40,000 plus dollars to accompany for real estate education. They then set up an S corporation, got some business cards and stationary. And that was the extent of the business operations.

[00:06:44] in this case, there were a few key considerations. That were looked at. The first consideration. Is. Under code section 1 62. When is the taxpayer entitled to [00:07:00] deduct? An expense as a business expense that is ordinary and necessary. Like when is it rightfully able to be deducted? And a part of the wording to that code section. Is that it relates to ordinary or necessary expenses paid or incurred? During a tax year in quote, carrying on any trader business. Now a lot of businesses do not make money for their first few years.

[00:07:29] That's not uncommon. A lot of businesses lose lots of money for multiple years that does not make or break whether or not someone is operating a business. However, in this case. There was all of the expense with none of the income, but also none of the proven effort to generate income. And none of the provable attempts. To actually continue to operate a business after buying the course, setting up the company, buying some [00:08:00] business cards that was the end of their effort. So for 2016, This couple reported over $40,000 of expenses as deductible business expenses. But when the court went back and looked, they really had no proof. That a good faith attempt was made. To actually run or operate or carry on a trader business. Part of the reason why. Is that it was never clearly defined what this couple's...