Reconsidering the election to segregate rental real estate undertakings.

• Author: Touger, Steven I.

Many tax practitioners have informed their clients of the advantages of electing to segregate rental real estate undertakings. By making this election, losses that may not be deductible because of the passive loss rules can be used against ordinary or investment income when the separate undertaking is disposed of. However, there are certain situations in which making this election could cause serious problems.

One such situation occurs when the taxpayer is renting land or other nondepreciable property. If the taxpayer has other rental real estate undertakings, it is important to consider Temp. Regs. Sec. 1.469-2T(f)(3).

Temp. Regs. Sec. 1.469-2T(f)(3) describes situations in which rental income will be recharacterized as nonpassive if less than 30% of the unadjusted basis of the property used in rental activity is depreciable.

Example 1: Taxpayer T leases land costing $300,000 which has an improvement that costs $100,000...