IRC 469 Passive Activities Part 4 Definition of activity rental real estate with active participation real estate professionals interaction with other rules 1 Activity 4 Definition of activity relevant for Classifying activity rental or T or B or something else Did taxpayer materially participate Did taxpayer dispose of the activity 2 Congress concerns with defining activity Blue Book TRA 86 page 245 3 Congress suggestion on defining activity Look at what is a separate activity per a realistic economic sense What undertakings consist of an integrated and inter related economic unit conducted in coordination with or reliance upon each other and constituting an appropriate unit for the measurement of gain or loss Analogy to hobby loss rules of 183 is appropriate The fact that two undertakings are conducted by the same entity such as a partnership or S corporation does not establish that they are part of the same activity Conversely the fact that two undertakings are conducted by different entities does not establish that they are different activities Rather the activity rules generally are applied by disregarding the scope of passthroughentities such as partnership and S corporations pg 247 4 IRS guidance TD 8175 regs 1988 did not define activity TD 8253 1989 included 4 on activity 4T f 4 i of the regulations provides that two trade or business undertakings are similar for purposes of section 1 469 4T f if and only if A there are predominant operations in each such undertaking and B the predominant operations of both undertakings are in the same line of business For purposes of this rule there are predominant operations in an undertaking if more than 50 percent of the undertaking s gross income is attributable to operations in a single line of business Rev Proc 89 38 listed the lines of business Replaced by TD 8565 1994 amended by TD 8645 1995 Generally simpler than temporary regs 5 Activity guidance 1 4694 Identify appropriate economic unit 1 or more business or rental activities can be treated as single activity if constitute an appropriate economic unit for the measurement of gain or loss for purposes of section 469 AEU depends on facts and circumstances Can use any reasonable method of applying the relevant facts and circumstances in grouping activities 6 Relevant facts and circumstances i ii iii iv v Similarities and differences in types of trades or businesses Extent of common control Extent of common ownership Geographical location Interdependencies between or among the activities 7 Caveats Can t group rental with T or B Unless one is insubstantial to the other EX owner of apartment building has a news stand outside that is open every morning Can t group personal property rentals with real property rentals Can t group activities of limited partners with other activities 8 Example from regs T owns Bakery and movie theater in Baltimore Bakery and movie theater in Philadelphia Question what are possible activity groupings 9 Activity grouping documentation Generally must stick with original grouping If think need to regroup see Rev Proc 2010 13 Be sure have documentation as to what is grouped and why IRS may regroup to prevent avoidance of the rules Groupings for real estate professionals See 1 469 9 per 1 469 4 h and RP 2010 13 3 10 469 grouping guidance Rev Proc 2010 13 Follow up to Notice 2008 64 Statement required to be filed with original return to describe P S and S corps follow instructions on Forms 1065 or 1120S instead Failure to report treat activities as separate New groupings of passive activities Adding new activity to existing group Regroupings of passive activities why Relief timely disclosure shall be deemed made by a taxpayer who has filed all affected income tax returns consistent with the claimed grouping of activities and makes the required disclosure on the income tax return for the year in which the failure to disclose is first discovered by the taxpayer If the failure to disclose is first discovered by the Service however the taxpayer must also have reasonable cause for not making the disclosures required by this revenue procedure No 9100 relief available IRS still has ability to regroup to prevent tax avoidance including in situations where failure to disclose would otherwise result in separate activities 1 469 4 f Effective for tax years beginning on or after January 25 2010 11 Example In current year AB Partnership was formed It owns 3 apartment buildings in the Bay Area A general partner manages all three Partner A also owns an apartment building on his own Q how many activities Q who does the grouping 12 Rental real estate w active participation 469 i Rationale Congress believed that a limited measure of relief however was appropriate in the case of certain moderate income investors in rental real estate who otherwise might experience cash flow difficulties with respect to investments that in may cases were designed to provide financial security rather than to shelter a substantial amount of other income Blue Book page 214 13 469 i RRE with active participation If applies allows up to 25 000 offset for RRE with AP So could use that loss against any type of income Taxpayer must own at least 10 by value of the activity Active participation is lesser standard than MP Unless future regs provide an exception a ltd partner can t be an active participant Benefit phases out for taxpayers with MAGI between 100 000 and 150 000 Only applies to individuals and certain estates In measuring PAL for year need to group RRE AP together 1T f 2 iii Also see Form 8582 and instructions 14 Active participation per Congress Blue Book page 244 15 Real Estate Professional 469 c 7 Added by RRA 93 Reg 1 469 9 Benefit For eligible taxpayer rental real estate such as an apartment building is not automatically passive RRE can t be grouped with T or B Several cases Many involve whether taxpayer met the MP rule May not have if did not properly elect to group RRE such as to make it easier to meet MP Important to also have good records on MP 16 Passive Activity Losses Audit Technique Guide 2 05 17 18 19 20 21 22 469 c 7 Trask TC Memo 2010 78 T owned over 30 rental properties 2001 reported aggregated loss for all properties on Sch E of about 27K Issue Did T elect for 2001 to treat his RRE activities as single activity under 469 c 7 Per court T must show that he 1 qualifies as real estate professional 469 c 7 B for 2001 2 elected per 469 c 7 A to treat his RRE activities as a single