Taxpayers that own several rental properties have to make many decisions when it comes to reporting income or loss from those properties. Among them is whether it would be more beneficial for the income or loss to be characterized as active rather than passive. If the taxpayer wants active characterization applied to income (e.g., to reduce or eliminate liability for the new Sec. 1411 net investment income tax) or loss (e.g., to avoid the Sec. 469 passive loss limitation), it must then decide whether to aggregate the rental activities.
If the taxpayer decides to aggregate the activities, filing the election under Sec. 469(c)(7)(A) to do so is crucial. It may behoove taxpayers to file a late election, as the IRS now allows in certain instances.
REAL ESTATE PROFESSIONALS
For individuals and certain entities, Sec. 469(a) generally disallows for the tax year any passive activity loss, defined as the excess of the aggregate losses from all passive activities for the tax year over the aggregate income from all passive activities for that year. A passive activity is any trade or business in which the taxpayer does not materially participate. Rental activity is treated as a per se passive activity unless the taxpayer is a real estate professional.
Under Sec. 469(c)(7)(B), a taxpayer qualifies as a real estate professional, and a rental real estate activity of the taxpayer is not a per se passive activity under Sec. 469(c)(2), if (1) more than one-half of the personal services performed in trades or businesses by the taxpayer during the tax year are performed in real property trades or businesses in which the taxpayer materially participates, and (2) the taxpayer performs more than 750 hours...