Grouping rental real estate activities under Regs. Secs. 1.469-4 and 1.469-9.

• Author: Janz, Ellen

When the IRS announces a change in the application of existing tax law, practitioners frequently revisit the fundamentals in the area of change so as to understand the change. One such change was under Rev. Proc. 2010-13 and the application of activity groupings under Sec. 469. Much has been written recently about the new disclosure requirements for passive activity loss groupings as established under Rev. Proc. 2010-13. This item reviews fundamental relationships of the grouping of activities under Regs. Sec. 1.469-4 and the grouping of rental real estate activities under Regs. Sec. 1.469-9. It is important to make a distinction between the two as they relate to the passive activity limitations of Sec. 469. These two activity grouping options provide opportunities for the taxpayer to lessen the negative effects of Sec. 469.

Under Regs. Sec. 1.469-4, the taxpayer can choose to group trade or business activities with other trade or business activities. In order to group any two or more activities, they must together represent an appropriate economic unit. The factors establishing an economic unit are listed in Regs, Sec. i.469-4(c). While the "economic unit" requirement applies to all Regs. Sec. 1.469-4 activity groupings, the successful grouping of a rental activity with a nonrental activity necessitates meeting an additional requirement under Regs. Sec. 1.469-4(d).

Under Regs. Sec. 1.469-4(d), a taxpayer may not group a trade or business activity and a rental activity to form a single activity unless one of the following conditions exists:

* The rental activity is insubstantial in relation to the trade or business activity;

* The trade or business activity is insubstantial in relation to the rental activity; or

* Ownership in the trade or business activity and in the rental activity are proportionate to each other.

However, for real estate professionals, as discussed below, the rules of Regs. Sec. 1.469-9 place further restrictions for the grouping of a rental real estate activity with any other activity.

While this item addresses the differences between the two regulations from a high-level perspective, there are additional rules for limited partners, limited entrepreneurs, other activities identified by the IRS, and activities conducted through Sec. 469 entries that will not be discussed here.

Regs. Sec. 1.469-9 applies to taxpayers meeting the requirements of Sec. 469(c)(7). Throughout this discussion, these requirements will be...