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Hobby Loss Rules

After many years as a successful orthodontist, Martha has decided to buy a ranch in the country. Martha has always liked horses and anticipates acquiring several for the ranch. On the weekends, Martha can relax at the ranch and ride her horses. The cost of operating the ranch and owning horses will be substantial so she plans to treat it as a business and use the expenses to offset her income as an orthodontist. She anticipates that the ranch will appreciate in value over the next ten years.

What tax issues do you see with her plans? Discuss anything Martha can do to strengthen her situation. What are the consequences if the ranch is never profitable?

Solution Preview

The problem states that Martha intends to purchase the ranch for purposes of relaxation on the weekends. It does not state whether she intends to reside their full time or simply to use it on weekends. If she will live elsewhere, she can treat the purchase as an investment at best (since it states the property will appreciate over the next ten years). If she lives their full time, she can treat it as gains on primary reseidence (if she will ever sell the property). However, operating the ranch as a ...

Solution Summary

The solution describes how the IRS might determine a ranch is a hobby rather than a legitimate business.