Tax Court Also Questions Whether Taxpayer Meets 750 Hours Needed to Claim Passive Losses

A recent tax case involved a situation that a qualified intermediary (QI) is frequently asked about.  "How long must I wait before moving into my replacement property?"  While a QI is not permitted to give its clients tax or legal advice, it certainly can share this case and others with the client and his/her professional advisors to help empower them to make the best decision in his/her individual situation. 

In Goolsby v. Commissioner (April 1, 2010), T.C. Memo. 2010-64, the Tax Court found that Mr. and Mrs. Goolsby had no intent to rent one of the two replacement properties acquired and their sole objective was to use it as their primary residence.  Here are the facts of this case:

• Taxpayer owned primary residence in Castro Valley, CA.
• In October 2002, Taxpayer signed agreement to purchase a property in Fayetteville, GA (Pebble Beach).  Agreement was contingent on the sale of Taxpayer's Castro Valley, CA home.
• On February 11 2003, Taxpayer sold the Castro Valley primary residence and relocated to Fayetteville, GA where they began living with their in-laws.
• Taxpayer purchased an investment property in Oakland, CA in 1990 for $270,000.  On March 3, 2003, Taxpayer sold Oakland property for $605,000 through a 1031 exchange.
• Taxpayer identified and acquired the Fayetteville, GA (Pebble Beach) property as well as a second Fayetteville (Meadowbrook) property.
• Taxpayer attempted to rent the Pebble Beach property by placing an advertisement in a neighborhood newsletter, Fayetteville Neighbor. 
• Unrelated to the 1031 exchange, Mrs. Goolsby served as the primary caretaker of Taxpayer's several rental properties but failed to keep contemporaneous logs of the time she spent managing the properties.  Taxpayer reported she spent the required 750 hours managing the properties to meet the requirements for being a real estate professional (Section 469(c)(7)(B) and claim all of the passive losses.  She did create "activity" logs after their 2003 and 2004 federal returns were examined by IRS. 
• Taxpayer claimed passive losses of $109,919 on their 2003 return and $31,857 in 2004 related to their rental properties.
• In January 2007, IRS sent Taxpayer a notice of tax deficiency and Taxpayer filed a petition with the Tax Court for redetermination of the deficiencies.