Académique Documents
Professionnel Documents
Culture Documents
and taxpayers generally may not treat an activity involving the rental of real
property and an activity involving the rental of personal property as a single activity.
Material Participation: taxpayer actively participated in a no rental trade or business
activity, any loss from that activity is treated as an active loss that can offset active
income or portfolio income.
Material participant is one who has a significant nontax economic profit motive for
taking on activities and selects them for their economic value. S 469 requires a
taxpayer to participate on a regular, continuous, and substantial basis to be a
material participant.
Seven Test divided in three categories: Test based on current participation; test
based on prior participation and test based on facts and circumstances. Material
participation is achieved by meeting any one of these tests.
Participation Defined: work done in activities that one owes. It should be done
constantly. It does not include work if it is of a type not usually done by owners and
if one of its principal purposes is to avoid the passive losses or credit limitations.
Reviewing reports in a non-managerial capacity is not counted in applying the
material participation test. Participation of owners spouse counts as participation by
the owner.
Limited Partners: limited partner is not considered a material participant unless
qualifies under test 1, 5, or 6. A general partner may qualify as a material
participant by meeting any of the seven tests.
Rental Actives defined: all treated as passive activity; subject to passive activity loss
even if the taxpayer is material participant involved. Exception to the rule is based
on the presumption that a person who rents property for is required to provide
significant service to the customerinvolved in service business.
Interaction of at-risk and Passive loss limits: the determination of whether a loss is
suspended under the passive loss rules is made after application of the at-risk rules,
as well as other provisions relating to the measurement of taxable income.
Special Passive activities Rules for Real Estate Activities: allow real estate rental
losses to offset active or portfolio income.
Material Participations in a Real Property Rental Trade or Business: taxpayers must
meet: more than half of the personal services that the taxpayer performs in trades
or businesses are performed in real property trades or businesses in which the
taxpayer materially participates; the taxpayer performs more than 750 hours of
services in these real property trades or businesses as a material participant. Hours
working for spouse does not count toward 750 hours; service provided for
employees not count, unless the employee performing services owns more than a
5% interest in the employer.
Real Estate Rental Activities: real estate professionals can deduct up to 25,000 of
losses from real estate rental activities against active and portfolio income. must
meet: Actively participate in the real estate rental activity; own 10 percent or more
(in value) of all interests in the activity during the entire taxable year (or shorter
period during which the taxpayer held an interest in the activity).
The difference between active participation and material participation is that the
former can be satisfied without regular, continuous, and substantial involvement in
operations. It can be involved in management decision such as approving new
tenants, deciding on rental terms, and approving capital expenditure.
Disposition of Passive interest
Disposition of a passive Activity at death: transfer because of taxpayer death,
suspended losses are allowed (to the decendant) to the extendt they exceed the
amount, if any, of the allowed step-up basis (increase because of fair value), if not
losses are lost.
Disposition of a Passive activity by a Gift: the suspended losses are added to the
bases of the property. Suspended losses become nondeductible to both the donor
and the done. Grater depreciation deduction result because of the increase on the
propertys basis. Not materialize if it is given to charity organization
Installment sale of a Passive Activity: installment sale of a taxpayers entire interest
in a passive activity triggers recognition of the suspended sale. Losses are allowed
as payment received each year.
Investment interest Limitation
Limited imposed: investment interest interest paid on debt borrowed for the
purposed of purchasing or continuing to hold investment property\. It is limited to
the lesser of the investment interest paid or net investment income.
Investment income and expenses: serves as the ceiling on the deductible of
investment interest, excess of investment income over investment expenses.
Investment income includes gross income from interest, annuities, and royalties in
the ordinary course of he trade or businessnot passive activity included.
Computation of Allowable deduction: the amount invested interest disallowed is
carried over to future years. No limits in the length of the carryover period.