Fall 2023 Tax Update

Big losses claimed by real estate professionals get scrutiny. Real estate pros must spend over half of their working hours and more than 750 hours a year materially participating in realty to beat the passive-activity loss rules. Joint filers can’t combine their hours. A couple took a $24,000 loss for cabins they rehabbed for rental. The husband may have spent more than 750 hours on the rental activity, but the Tax Court didn’t believe he spent more than 50% of his total working hours on it, considering he also had a full-time sales job (Teague, TC Summ. Op. 2023-16)…

Claiming big charitable write-offs for clothing donations proves costly taxwise. A man donated clothes in good condition to Goodwill and the Salvation Army over 170 times and got a receipt for each trip. He claimed the gifts totaled over $25,000. He attached two Forms 8283 to his return, but he failed to get a written appraisal, claiming he didn’t need it because he didn’t donate any item worth over $5,000. But that’s not how the rules work. All similar donated property is aggregated. Since he donated over $5,000 of clothes to the two charitable organizations, he needed a qualified appraisal signed by an appraiser. Because he didn’t get one, the Tax Court disallowed his charitable deduction (Bass, TC Memo. 2023-41).

There’s a 10-year clean-out rule for many IRAs inherited after 2019. The IRA funds must be distributed to beneficiaries within 10 years of the owner’s death. There are some exceptions for beneficiaries who are surviving spouses or minor children of the account owner, or beneficiaries who are chronically ill, disabled, or not more than 10 years younger than the deceased IRA owner. For minor children, the exception applies only until the child reaches age 18. The rule for spouses didn’t change. Unlike other beneficiaries, a surviving spouse still has the option to take an inherited IRA as his or her own. Also, the old rules still apply for people who inherited IRAs before 2020, so that they can continue to take advantage of the stretch IRA strategy.