Today the Tax Court looked at whether a rental was passive or active. But there was a major difference from most such cases: The taxpayer claimed his lease was passive while the IRS thought it was not passive.
Most of the time, rental income is passive. There are some exceptions: The most common is a Realtor (who meets the time requirements). The petitioner in today’s case was a doctor, and in almost all cases the rental would be passive. However, the lessee was his business (a professional corporation), so the self-renting rules apply (unless there’s an exception).
The petitioner claimed he had a legal, binding contract (a lease) entered into in 1980. If there is a binding contract entered into on or before February 19, 1988, the exception applies. There was a problem, though. The lease called for payments that would increase by 5% per year (the lease had never been modified). The payments made as “rental expense” didn’t match what was required under the lease. That meant the lease was not a binding contract, and the taxpayer had non-passive income.
For the taxpayer, this could have been resolved had he (or his CPA) noted the terms of the lease and made payments based on the lease. Unfortunately for them, they didn’t read it.