Electing to aggregate rental real estate activities for real estate professionals.

• Author: Ellentuck, Albert B.
• Position: Case study

Facts: Pierre Camus is a general partner in the Left Bank Partnership, a real estate management company. He spends around 1,500 hours each year performing personal services for the partnership. He individually owns six separate rental real estate properties. One of the properties, Cathedral Apartments, produces a $30,000 current loss and has a $100,000 suspended loss. He spends 100 hours per year managing the complex and is considering selling it. The five other properties produce current tax losses of $40,000. He spends 100 hours per year managing each of them. In prior years, he has been unable to deduct the losses from these properties, because his adjusted gross income exceeded $150,000. Pierre has heard of the election available to real estate professionals for grouping rental real estate properties. He comes to his tax adviser for advice. Issue: Should Pierre make the election to group his rental real estate properties as provided under Sec. 469(c)(7)(A)?

Analysis

Sec. 469(c)(7) provides that qualifying taxpayers are not required to treat rental activities as passive per se. To qualify for this special treatment, taxpayers must satisfy two requirements:

1. They must perform over 750 hours of personal services in real property trades or businesses in which they materially participate; and

2. Over half of their personal services must be performed in real property trades or businesses in which they materially participate.

   If these two requirements are met, qualifying taxpayers who materially participate in rental real estate activities can treat them as nonpassive.

   The regulations permit qualifying taxpayers to elect in any year after 1993 to treat all rental real estate activities as a single activity, regardless of how they were treated in prior years. Regs. Sec. 1.469-9(g) treats this election as binding for the current year and all future years. The taxpayer can revoke the election only if a material change occurs in his facts and circumstances. The election to aggregate a taxpayer's rental real estate activities does not affect the determination of whether the taxpayer materially participates in a limited partnership interest. Taxpayers who adopted rental real estate groupings under Regs. Sec. 1.469-4 should review their groupings.

   If the election is made, material participation will be determined for the combined activity. Thus, taxpayers will have to determine if they satisfy one of the seven tests for material participation (Temp...