Relief for late election to treat all real estate rental interests as one activity.

• Author: Wong, Alan

The IRS has issued guidance on how certain taxpayers can make a late election to treat all interests in rental real estate as a single rental real estate activity (Rev. Proc. 2011-34).

Background

Sec. 469 imposes restrictions on the allowance of passive activity losses and credits. Under Sec. 469(c)(2) passive activity includes any rental real estate activity except as provided in Sec. 469(c)(7).

Sec. 469(c)(7) provides special rules for taxpayers in real property businesses. If a taxpayer meets the requirements of Sec. 469(c)(7)(B), the taxpayer will qualify as a real estate professional, and the rental real estate activity will no longer be presumptively passive.

Under Sec. 469(c)(7)(B), for a taxpayer to qualify as a real estate professional, more than one-half of the personal services that the taxpayer performs in trades or businesses (individual, estate, or trust) during the tax year must be in real property trades or businesses in which the taxpayer materially participates, and the taxpayer must perform more than 750 hours of services during the tax year in real property trades or businesses in which the taxpayer materially participates.

In the case of a closely held C corporation, the requirements of the above paragraph are met for any tax year if more than 50% of the gross receipts of such corporation for the tax year are derived from real property trades or business in which the corporation materially participates. Personal services performed as an employee are not treated as performed in real property trades or businesses unless such employee is a 5% owner. "Real property trade or business" is widely defined and includes any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.

Election

Sec. 469(c)(7)(A) provides that each of a taxpayer's interests in rental real estate is treated as a separate activity for determining whether the taxpayer materially participates in each rental real estate activity. However, Regs. Sec. 1.469-9(g) permits a taxpayer to make an election to treat all of the taxpayer's interest in rental real estate as a single rental real estate activity. To make the election, a qualifying taxpayer needs to file a statement with the taxpayer's original income tax return for the tax year. The statement must contain a declaration that the taxpayer is a qualifying taxpayer for the tax year and is making the...