In January 2018, Renee Harding and her husband were divorced after 20 years of marriage. She received a substantial property settlement that included the house and an adjoining office set on five acres of land. Two-thirds of the office and the land were used by Renees daughter for horse stables and a riding arena.

Her annual alimony allowance allows Renee to live a comfortable life without working. Renee had never worked outside of the house, spending her time instead taking classes, traveling and playing tennis. In 2005, Renee earned a bachelors degree in art from a nearby state university.

For several years, Renee owned two purebred terriers as pets, and she developed an interest in raising, breeding, and showing them for profit. To keep herself busy after the divorce, Renee decided to purchase five terriers to start breeding in February 2018.

Renee had part of the office converted into a ten-pen kennel. She purchased an advertisement in Dog World for her services as a breeder, and signed onto the breeding network. In the summer of 2018, Renee attended several dog shows across the country, and spent a lot of time with friends because the shows sponsored many social activities.

Renee maintained detailed records for each terrier purchased, with space for all the stud fees, receipts from the sale of puppies, and the cost of caring for the dog. The closest veterinarian was twenty minutes away. In December 2018, Renee sold one puppy from her first litter of five. The net loss from the operation in 2018 was $25,406.

Required:

Write a letter to Renee concerning the tax treatment for Renees loss from her dog breeding activities. Use only the Internal Revenue Code and Regulations as authority.