The expectation of appreciation of assets, such as a breeding stallion or a horse facility, is considered in determining whether the taxpayer intended a profit. The expectation must be that the operating income and capital gains from selling the asset would more than cover the expenses involved in the activity. An example is showing a stallion accrues expenses. Would the showing increase the value of the stallion covering the costs of showing? Did a show record increase the number of mares bred to the stallion? If you were audited you may need to provide proof by a horse appraiser. Have you purchased a yearling with the intent of racing it as a two-old? The race horse accrues training fees, trainer fees at the racetrack, veterinary fees etc. Is the expectation of once the horse is raced you will cover the costs of training and racing? Will training an unbroken horse increase the horse’s value? Have you increased the value of your land by improving the fence, building a barn on the property, landscaping the property? These would be an expectation that the improvements increased the value of the property. Are there other assets purchased for the intent of increasing the value of the business? Is this asset necessary to manage the business? I try to make small improvements each year. An example would be placing sand in my arena both increases the value but also increases the aesthetic look of the arena hopefully bringing in more customers. If you were audited, you should be able to prove that the land was purchased, maintained and improved with the expectation that it would appreciate in value. You may need to have an appraisal conducted to show that the improvements you made to the property have increased the value, even if you have several loss years.