Passive loss relief for real estate professionals.

• Author: Pinto, Marc

Sec. 469 provides limited relief from the passive activity loss (PAL) rules for certain real estate professionals. Proposed regulations under Sec. 469(c)(7) now provide guidance for making the election to treat all rental real estate interests as one activity, and for how this relief measure applies to rental real estate interests held through limited partnerships. These regulations would apply after 1994.

In general, Sec. 469(c)(7) provides that the "rentals are always passive" rule of Sec. 469 does not apply to rental real estate activities held by qualifying real estate professionals. In general, qualifying taxpayers are those who spend more than 750 hours per year and more than half their working hours in real property trades or businesses in which they materially participate. Note that the makeup of a taxpayer's real property trade or business is not necessarily the same as that of an activity. Thus, rentals and business operations that involve real estate may be grouped in any reasonable and consistent fashion for identifying one or more real property trades or businesses in which the taxpayer materially participates. If the qualification tests are met, the taxpayer's rental real estate activities are treated the same as all other activities: losses are generally deductible if the taxpayer materially participates in the activity. Losses from rental activities that have been suspended from prior years are subject to the former passive activity rules of Sec. 469(f).

While the regulations reiterate many of the rules of Sec. 469(c)(7), the main new guidance relates to (1) the election in Sec. 469(c)(7) to treat all interests in rental real estate as one activity and (2) the treatment of interests in rental real estate held by a limited partnership.

Election to aggregate rental real estate interests into one activity

Prop. Regs. Sec. 1.469-9 reiterates the statutory provision of Sec. 469(c)(7)(a), which allows qualifying taxpayers to treat all interests in rental real estate as one activity for purposes of Sec. 469. Typically, the benefit of making this election would be that the taxpayer would more likely be able to demonstrate material participation in the single larger rental activity. The detriment of the election lies in a potential inability to free up suspended losses on the disposition of less than all of the realty interests comprising the larger activity.

The regulations provide that each rental real property interest is treated...