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Passive Activity Loss ATG - Exhibit 2.4: Real Estate Professionals

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.


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Exhibit 2.4: Real Estate Professionals

LAW: Under IRC § 469(c)(7) & Reg. 1.469-9, if the taxpayer spends the majority of his time in real property businesses, meeting the 1/2 personal services and 750-hour tests, rental real estate losses are no longer per se passive. If the taxpayer materially participates in each rental real estate activity, losses are fully deductible.  If not, even though the taxpayer is a real estate professional, losses are passive and deductible only up to $25,000 (if MAGI is less than $100,000).   The IRC § 469(c)(7) does not trigger carryover losses from prior years.

_____ Verify that one spouse alone meets BOTH of the following tests.

FIRST TEST: Are more than half of personal services in all businesses (T/B) for the year performed in real property T/B and rental real estate?  

--Real property T/B = real property development, construction, acquisition, conversion, rental operation, management, leasing or brokerage.  Time spent as an employee in real property activities counts only if the taxpayer is more than a 5 percent owner.

SECOND TEST: Does taxpayer spend more than 750 hours in real property businesses and rentals in which he materially participates?

_____ If answer is NO to either of above two tests, IRC § 469(c)(7) does not apply, and losses are generally limited to $25,000.     

_____ If answer is YES to both tests, apply material participation tests to each rental real estate activity to determine whether each activity is passive or non-passive.  While not seen often, the taxpayer may have made a one-time election to group all rentals as a single activity.  Thus material participation is determined based on the grouped rentals.  See IRC § 469(c)(7)(A) and Reg. § 1.469-9(g).    

CONCLUSION:

  1. Per IRC § 469(c)(7), the following rental real estate activities have been determined to be non-passive and current (but not carryover)  losses are fully deductible: ______________  Current losses are entered on Schedule E, but not on FORM 8582.
  2. Taxpayer is a real estate professional, but did not materially participate in the following real estate  activities: _____________  He does, however, actively participate, making management decisions.  Losses are entered on FORM 8582 line 1a.
  3. Taxpayer does not actively participate in the following rental real estate activities: ______________.  Limited partners and Taxpayers who own less than 10 percent cannot rise to the active participation standard.  Losses are entered on FORM 8582, line 3b (2b for years before 2002).

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