Passive%20Activity%20Loss%20Limitations

1
Passive Activity Loss Limitations

• Video 2
• Reviewing the rental exception and material
  participation examples from the regulations

2
Relevance of rental activity

• If have a rental activity is automatically a
  passive activity (469(c)(2))
• Unless
• Falls under rules of 280A(c)(5)
• So, loss would be limited under that rule rather
  than 469
• But classification can change annually depending
  on amount of personal use of the dwelling.
• Is real estate owned by a real estate
  professional (469(c)(7)) in which case they are
  allowed to apply the material participation tests
  to it to determine if it is active or passive

3
What is a rental activity?

• 469(j)(8) rental activity any activity
  where payments are principally for the use of
  tangible property.
• More in the regs
• -1(e) and -1T(e)

4
Rental exceptions

• 1.469-1T(e) and -1(e)
• Average period of customer use lt 7 days
• Average period of customer use lt 30 days AND
  significant personal services provided
• Average period of customer use gt 30 days and
  extraordinary personal services provided
• Rental incidental to a non-rental activity
• Property available during defined business hours
  for nonexclusive use by various customers
• Property provided by its owner for use in an
  activity of a p/s, S corp or joint venture in
  which the owner has an interest
• Exceptions must be applied each year.

5
Rental exception examples

• -1T(e)(3)(ii)
• Average period of customer use lt 7 days
• No example provided in regs.
• Average period of customer use lt 30 days AND
  significant personal services provided
• Examples 2 and 4
• Average period of customer use gt 30 days and
  extraordinary personal services provided
• Examples 1 and 3

6
More rental exception examples

• Rental incidental to a non-rental activity
• Examples 5, 6 7
• Property available during defined business hours
  for nonexclusive use by various customers
• Example 10
• Property provided by its owner for use in an
  activity of a p/s, S corp or joint venture in
  which the owner has an interest
• Example 8

7
One more rental example from regs

• Example 9
• Isnt really illustrating an exception, but how
  to determine if you have a rental activity
• Try to think of examples on your own as well.

8
Relevance of material participation

• If have a T or B (or rental real estate of a RE
  professional), and materially participate, then
  the activity is not a passive activity.
• Year by year determination.
• Is not the same as active participation as used
  in 469(i).

9
General rule on MP

• 469(h) Taxpayer is a material participant in an
  activity only if T is involved in the operations
  of the activity on a basis which is
• (A) regular,
• (B) continuous, and
• (C) substantial

10
Reg guidance on material participation

• -5 and -5T
• IRS provides 7 possible tests and provides
  examples for most

11
MP tests

• Quantitative Tests
• gt 500 hours
• Participation constitutes substantially all of
  the participation in such activity of all
  individuals (including individuals who are not
  owners of interests in the activity) for such
  year
• Participation gt 100 hours and is not less than
  participation of any other individual (including
  individuals who are not owners of interests in
  the activity) for such year
• Significant participation activity (SPA) and
  aggregate participation in all SPAs during year gt
  500 hours
• Prior Year MP Tests
• MP in any 5 prior tax years (whether or not
  consecutive) during prior 10 years
• Personal service activity and individual
  materially participated in the activity for any 3
  prior tax years (whether or not consecutive)
• Facts and Circumstances Test
• Based on all of facts and circumstances,
  individual participates in the activity on a
  regular, continuous, and substantial basis during
  the year

12
MP examples of the 7 tests

• gt 500 hours
• Example 1 2
• Substantially all
• Participation gt 100 hours and is not less than
  participation of any other individual
• Example 3
• Significant participation activity (SPA) and gt
  500 hours
• Example 4
• MP in any 5 prior tax years during prior 10 years
• Example 5 6
• Personal service activity and MP in any 3 prior
  tax years
• Facts and circumstances
• Example 8

13
MP examples of what is proper participation

• Example 7
• Think of other examples on your own.