Passive Activity Loss ATG - Exhibit 2.3: Rental Real Estate Losses: Active Participation
Publication Date - December, 2004
NOTE: This guide is current through the publication date. Since changes may have occurred after the publication date that would affect the accuracy of this document, no guarantees are made concerning the technical accuracy after the publication date.
Exhibit 2.3: Rental Real Estate Losses: Active Participation
Passive loss limitations for rental real estate generally apply to:
- Leased residential property
- Leased vacation homes if average rental period is more than 7 days.
- Leased condos if average rental period is greater than 7 days.
- Leased commercial buildings
- Leased land
- Self-storage units
ISSUE: Does the taxpayer actively participate and does he qualify for the $25,000 special allowance under IRC § 469(i)?
____ Have rental real estate losses been limited to $25,000 (or up to passive income from another passive activity)? If not, limit losses to $25,000, and continue on to verify active participation. If yes, continue on to verify active participation.
____ Is MAGI more than $150,000? MAGI is simply AGI computed without rental losses and any other passive losses and some minor modifiers. If AGI is more than $150,000, MAGI is almost always more than $150,000. If AGI plus the rental losses is more than $150,000, MAGI is more than $150,000.
____ Is the taxpayer a limited partner (and not also a general partner)? See IRC § 469(i)(6)(B). Note: Since many investors in low income housing are limited partners, losses will not qualify for the active participation standard and should be on line 3b. Therefore, no $25,000 offset is available. While LIHC are excepted from the active participation requirement, no such exception exists for LIH losses.
_____ Does the taxpayer own less than 10 percent? See Schedule K-1.
_____ Are losses from an activity other than real estate? Equipment, computers, boats, vehicles, etc. Leases of personal property are generally passive regardless of the level of participation See IRC § 469(c)(2)&(4).
If answers to any of the last 3 questions are answered YES, Taxpayer does not qualify for $25,000 offset. Loss should be moved to Line 3 of FORM 8582 and recomputed. In effect, the loss will be disallowed (unless there is passive income from another activity reported on F1040). If all answers above are NO, verify the taxpayer is actively participating (making management decisions relative to tenants, terms, repairs) via a statement or oral testimony. To be actively participating, the taxpayer must be making management decisions in a bona fide sense, not merely ratifying an on-site manager's decisions.
CONCLUSION: The taxpayer is/is not actively participating. Ref. IRC § 469(i), Reg. § 1.469-1T(e)(3).