Passive Activity Loss Limitations Video 2 Reviewing the rental exception and material participation examples from the regulations 1 Relevance of rental activity If have a rental activity is automatically a passive activity 469 c 2 Unless Falls under rules of 280A c 5 So loss would be limited under that rule rather than 469 But classification can change annually depending on amount of personal use of the dwelling Is real estate owned by a real estate professional 469 c 7 in which case they are allowed to apply the material participation tests to it to determine if it is active or passive 2 What is a rental activity 469 j 8 rental activity any activity where payments are principally for the use of tangible property More in the regs 1 e and 1T e 3 Rental exceptions 1 469 1T e and 1 e Average period of customer use 7 days Average period of customer use 30 days AND significant personal services provided Average period of customer use 30 days and extraordinary personal services provided Rental incidental to a non rental activity Property available during defined business hours for nonexclusive use by various customers Property provided by its owner for use in an activity of a p s S corp or joint venture in which the owner has an interest Exceptions must be applied each year 4 Rental exception examples 1T e 3 ii A Average period of customer use 7 days No example provided in regs Average period of customer use 30 days AND significant personal services provided B Examples 2 and 4 Average period of customer use 30 days and extraordinary personal services provided C Examples 1 and 3 5 More rental exception examples Rental incidental to a non rental activity D Examples 5 6 7 Property available during defined business hours for nonexclusive use by various customers E Example 10 Property provided by its owner for use in an activity of a p s S corp or joint venture in which the owner has an interest F Example 8 6 One more rental example from regs Example 9 Isn t really illustrating an exception but how to determine if you have a rental activity Try to think of examples on your own as well 7 Relevance of material participation If have a T or B or rental real estate of a RE professional and materially participate then the activity is not a passive activity Year by year determination Is not the same as active participation as used in 469 i 8 General rule on MP 469 h Taxpayer is a material participant in an activity only if T is involved in the operations of the activity on a basis which is A regular B continuous and C substantial 9 Reg guidance on material participation 5 and 5T IRS provides 7 possible tests and provides examples for most 10 MP tests Quantitative Tests 1 500 hours 2 Participation constitutes substantially all of the participation in such activity of all individuals including individuals who are not owners of interests in the activity for such year 3 Participation 100 hours and is not less than participation of any other individual including individuals who are not owners of interests in the activity for such year 4 Significant participation activity SPA and aggregate participation in all SPAs during year 500 hours Prior Year MP Tests 5 MP in any 5 prior tax years whether or not consecutive during prior 10 years 6 Personal service activity and individual materially participated in the activity for any 3 prior tax years whether or not consecutive Facts and Circumstances Test 7 Based on all of facts and circumstances individual participates in the activity on a regular continuous and substantial basis during the year 11 MP examples of the 7 tests 1 2 3 4 5 6 7 500 hours Example 1 2 Substantially all Participation 100 hours and is not less than participation of any other individual Example 3 Significant participation activity SPA and 500 hours Example 4 MP in any 5 prior tax years during prior 10 years Example 5 6 Personal service activity and MP in any 3 prior tax years Facts and circumstances Example 8 12 MP examples of what is proper participation Example 7 Think of other examples on your own 13