Last week I questioned whether a Tax Court judge was correct when he commented that absent an election to combine rental real estate activities under Sec. 469(c)(7), each real estate activity has to meet the “750 hour test” to make a taxpayer a “real estate professional.” This often would make a taxpayer’s status as passive or non-passive hinge on a procedural foot-fault — the filing of the Sec. 469(c)(7) election.
If a taxpayer becomes such a “qualified taxpayer,” then rental real-estate losses can be non-passive, and therefore deductible even absent offsetting “passive” income.
An alert reader poses this question to me:
Re the 750 hour test, Reg.Tags: passive activities, passive losses
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Thanks for the response.
I agree that if the taxpayer spends the majority of his time in real property businesses, meeting the personal services and 750-hour tests, rental real estate losses are no longer “passive.”
Yet IRC
Thanks for the response, L. Carpenter. If I understand correctly, you are asking what the point of an aggregation rule would be if you wouldn’t otherwise have to get to the 750-hour threshold for each activity.
I have always understood aggregation as a way to help the real estate pros achieve material participation when they have multiple properties. As every property is otherwise its own activity, somebody with many properties — say, a bunch of duplexes or four-plexes — might have trouble getting even to the 100-hour significant participation level for any given property. He might even have trouble participating “more than anyone else” if he hires somebody to do a lawn or a maintenance project. Aggregating the activities with a 469(c)(7) election could get the real estate pro over the 500-hour hump to become non-passive.
What I’m trying to say, apparently not very articulately, is that I think the judge is correct.
Here’s why I think so, after reading your post above and re-parsing the rules:
Pass the two tests (1/2 services & 750 hours), and rental real estate losses are no longer passive.
Materially participate in *each* rental real estate activity, and losses are fully deductible.
Do not materially participate in *each* rental real estate activity, and losses are deductible up to $25,000, even if you qualify as a real estate professional.
The material participation tests are applied to *each* rental real estate activity to determine whether each activity is passive or non-passive — unless the one-time election to group all rentals as a single activity is made. Then material participation is determined based on the grouped rentals.
I understand what you’re saying about trades or businesses (plural). Yet for a real estate professional, each interest in a rental real estate activity is a separate activity … [for purposes of meeting the material participation tests].
No need to respond until after 10/15.
I’m just trying to clarify my own understanding.
Thanks for the discussion.
Lorri
Great Analysis. I agree. I have a similar case where activities are not combined, but is a slam dunk under 1.469-5T(a)(2).IRS says need 750 on each