In early 2012, Walter Hodges began investigating the real estate market with the intention of acquiring real estate for investment or rental. He had not previously been involved in any real estate rental or investment ventures.
Walter started marketing his business via business cards, flyers, and word of mouth in spring 2012. At the same time, he completed a business plan for buying, remodeling, and renting property.
In October 2012, Walter paid $25,000 for training classes designed to provide real estate investment skills. He obtained a loan for his business of $45,000 from the U.S. Small Business Administration in November 2012. During the same month, he obtained an employer ID number from the IRS. In December 2012, he opened a checking account and obtained a credit card in the name of the business.
Walter attempted to purchase several properties during the last half of 2012, but he was unsuccessful until he acquired property on December 30, 2012. He listed the property for rent in early January 2013 and was successful in renting it in March 2013.
On his Form 1040 for 2012, Walter prepared a Schedule C on which he showed a business loss of $29,000. He included the cost of the training classes, automobile expenses, meals and entertainment, computer and software expenses, and supplies. Walter asked a friend, who is a CPA, to review his Schedule C calculations. His friend suggested that Walter should not be able to deduct the $29,000 on his 2012 return as he did not believe that Walter was in a trade or business during 2012. Evaluate whether Walter's trade or business activity began in 2012 or 2013?