Tax Memo

Client, Sally, works part-time as an independent contractor for a real estate development company. This year she has spent 1,000 hours working as a real estate developer and earned $25,000. She also works part-time as a graphic designer for a local advertising firm. This year she has worked a total of 900 hours at the advertising firm and earned $28,000. Additionally, Sally earns rent income from the 5 rental properties she owns. She spent 250 hours performing personal services on each rental property this year, including negotiating leases, meeting with prospective tenants, maintaining the properties, and coordinating repair work. Sally does use a management company to collect rents, advertise vacancies, and manage other necessary tenant issues. The employee at the management company that manages Sally's properties spent 100 hours this year on each of her properties. This year Sally earned rent income but because of significant repairs and depreciation deductions, she has a net loss of $50,000 from her rental properties. Sally also sold several capital investments this year and had a net long-term capital gain of $300,000. Prepare an internal research memo (see Chapter 2, pages 2-17 through 2-23 in the textbook) providing your decision and discussion of your findings addressing the following questions:

What are the tax implications to Sally related to her rental properties? Can she deduct the current year loss (be sure to look for the exceptions to the general rule)? Why or why not?

What additional tax implications might impact Sally next year if she were to generate overall net rental income instead of loss? You are not limited in the resources you use, but some items of reference that you might find helpful:

https://www.irs.gov/pub/irs-pdf/p925.pdf

https://www.law.cornell.edu/uscode/text/26/469

https://www.law.cornell.edu/uscode/text/26/1411

https://www.law.cornell.edu/uscode/text/26/1402

https://www.law.cornell.edu/cfr/text/26/1.469-4

https://www.law.cornell.edu/cfr/text/26/1.469-5