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Passive Activity Loss Limitations

Passive Activity Loss Limitations. Video 2 Reviewing the rental exception and material participation examples from the regulations. 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)

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Passive Activity Loss Limitations

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  1. Passive Activity Loss Limitations Video 2 Reviewing the rental exception and material participation examples from the regulations

  2. 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

  3. 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)

  4. 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.

  5. Rental exception examples -1T(e)(3)(ii) • Average period of customer use < 7 days • No example provided in regs. • Average period of customer use < 30 days AND significant personal services provided • Examples 2 and 4 • Average period of customer use > 30 days and extraordinary personal services provided • Examples 1 and 3

  6. More rental exception examples • Rental incidental to a non-rental activity • Examples 5, 6 & 7 • Property available during defined business hours for nonexclusive use by various customers • 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 • Example 8

  7. 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.

  8. 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).

  9. 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”

  10. Reg guidance on material participation • -5 and -5T • IRS provides 7 possible tests and provides examples for most

  11. MP tests Quantitative Tests • > 500 hours • 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 • 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; • Significant participation activity (SPA) and aggregate participation in all SPAs during year > 500 hours Prior Year MP Tests • MP in any 5 prior tax years (whether or not consecutive) during prior 10 years • Personal service activity and individual materially participated in the activity for any 3 prior tax years (whether or not consecutive) Facts and Circumstances Test • Based on all of facts and circumstances, individual participates in the activity on a regular, continuous, and substantial basis during the year

  12. MP examples of the 7 tests • > 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

  13. MP examples of what is proper participation • Example 7 • Think of other examples on your own.

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