Real estate rewards investors with some of the tax code's most powerful benefits, and those same benefits draw some of the IRS's closest attention. Depreciation, passive loss rules, like-kind exchanges, and conservation easements all carry technical requirements that are costly to defend if they were not met at the time.
When an examiner challenges a real estate professional claim, disallows a loss, or attacks an exchange or an easement deduction, the assessment can reach across multiple tax years and, in some cases, multiple properties. That is why the issues worth conceding and the ones worth taking to appeals or court get sorted early.
Whiteford represents real estate investors, developers, and owners in IRS audits and state tax disputes over the positions that matter most to real estate.
Where real estate draws IRS scrutiny
Several real estate positions are recurring audit themes: rental losses claimed against other income, real estate professional status, the valuations behind conservation easement deductions, and the treatment of gain on sale. They are technical, and they are commonly overstated.
The rules reward good records and disciplined structuring and punish the opposite. The difference between a defensible position and a costly one is usually documentation, plus timing decided before the return was filed rather than after a notice arrives.
Common issues
Passive loss limits and real estate professional status
Rental real estate losses are generally passive and offset only passive income unless an exception applies. A limited allowance lets some owners deduct capped rental losses against other income, but it phases out as income rises. Real estate professional status requires more than half your working time, and more than 750 hours a year, in real property businesses.
Material participation in the rentals
Qualifying as a real estate professional is not the end of the analysis, and this is the point the IRS presses hardest. You must still materially participate in the rental activities for the losses to be treated as nonpassive. We defend these claims and build the hour-by-hour records they require.
1031 like-kind exchanges
A properly structured exchange defers gain when one investment property is traded for another. Since the 2017 tax law, Section 1031 applies only to real property, and the timing, identification, and qualified intermediary rules are strict. The IRS examines whether an exchange really qualified and whether cash received should be taxed.
Depreciation and recapture
Depreciation shelters rental income during ownership and comes back on sale, when gain attributable to prior depreciation is recaptured and a different maximum rate can apply to unrecaptured depreciation on real property. Disputes turn on basis, on cost segregation studies, and on how the gain is characterized.
Conservation easements
Easement deductions, and syndicated arrangements in particular, have been among the most heavily litigated tax issues in recent years, drawing intense IRS scrutiny and, more recently, statutory limits on deductions for syndicated transactions. Investors who claimed them can face audits, penalties, and litigation over valuation and compliance.
Loss limitations and multi-issue audits
Beyond the passive loss rules, noncorporate taxpayers are subject to an excess business loss limitation with annual thresholds and carryover rules. Real estate audits frequently combine several of these issues at once, and the resolution depends on the records behind each position. We narrow the issues and take the strong ones forward.
Recommended next steps
- Keep contemporaneous, hour-by-hour time records for your real property businesses if you claim real estate professional status.
- Pull the full exchange file, including identification notices and the qualified intermediary agreement, before answering any question about a 1031.
- Have your basis and any cost segregation study reviewed before you sell, not after the gain is reported.
- If you claimed a conservation easement deduction, review the exposure with counsel before an audit begins.
How we help
Frequently asked questions
The IRS disallowed my rental losses. Can I fight it?
What does it take to be a real estate professional for tax purposes?
Is my 1031 exchange safe from IRS challenge?
I invested in a conservation easement. Am I at risk?
Why is my gain taxed higher when I sell a rental?
Where we work
All Whiteford offices where you can meet with an attorney
Baltimore
Suite 1500
Baltimore, MD 21202
Columbia
Suite 400
Columbia, MD 21045
Ocean City
Ocean City, MD 21842
Rockville
Suite 800
Rockville, MD 20850
Towson
One West Pennsylvania Avenue
Towson, MD 21204-5025
Denver
Denver, CO 80211
Bethany Beach
Bethany Beach, DE 19930
Rehoboth Beach
Rehoboth Beach, DE 19971
Wilmington
Suite 300
Wilmington, DE 19801
Washington, DC
Suite 1300
Washington, DC 20006
West Palm Beach
West Palm Beach, FL 33401
Lexington
Lexington, KY 40507
Fairfield
Suite 100
Fairfield, NJ 07004
New York
4th Floor
New York, NY 10022
White Plains
White Plains, NY 10604
Charlotte
Suite 315
Charlotte, NC 28211
Pittsburgh
Suite 1400
Pittsburgh, PA 15222
Falls Church
Suite 800
Falls Church, VA 22042
Richmond
Suite 2001
Richmond, VA 23219
Roanoke
Suite 1110
Roanoke, VA 24011
Virginia Beach
Suite 300-91
Virginia Beach, VA 23462
No offices in that state yet. Federal matters are handled from any office.