Max owns an office building that he rents for $750 a month. Under the terms of the lease, the tenant is responsible for paying all property taxes and costs related to the building’s operation and maintenance. The only cost to Max in relation to the lease is an annual legal fee for renewing the lease. Is Max engaged in the trade or business of renting real estate? How would you classify his deduction for the attorney’s fee?
The IRS historically viewed the rental of a single piece of improved real estate as a trade or business. If the IRS continues this position, the attorney fees are a deductible business expense.
However, the IRS has indicated that rental property must produce active income to be considered a trade or business. In determining whether rents are active business income, the scope of the lessor’s ownership and management activities are important considerations. If the IRS continues this position, the attorney fees are expenses related to the production of income because Sam is not actively involved the operation of the rental activity.
Regardless of classification, expenses related to earning rental income are deductible for adjusted gross income.
