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Filing Separately May Not Be a Wise Tax Choice

Gelman, Rosenberg & Freedman CPAs is a member of CPAmerica International, an association of CPA and consulting firms that provides industry knowledge including insightful articles, to help member firms serve clients and other individuals and organizations.

Apr 3, 2014

A recent decision by the U.S. Tax Court highlights yet another reason that married couples can be penalized if they choose to file separate tax returns.

Julie Oderio was married and lived with her husband. During 2008, she was a full-time employee and also owned rental property. Oderio filed her 2008 return as a married person filing separately. On her return, she claimed a deduction for a rental loss of $29,583 from the rental property.

The IRS disallowed the rental loss deduction on the basis that it was a passive activity loss. In court, Oderio argued that her rental loss was not a passive activity loss because her husband qualified for the exemption from the passive activity loss rules by virtue of being a real estate professional.

The Tax Court agreed with Oderio that the regulations treat the material participation activities of one spouse as material participation by the other spouse, regardless of whether a joint return is filed.

However, the court distinguished the real estate professional regulations. The court concluded that, when one spouse meets the tests for being considered a real estate professional, those activities are attributable to the other spouse only when a joint return is filed (Julie A. Oderio v. Commissioner, TC Memo 2013-39, March 19, 2014).

The court also imposed the accuracy-related penalty.

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