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:: Passive Activity Loss ATG - Exhibit 2.3: Rental Real Estate Losses: Active Participation
Exhibit
2.3: Rental Real Estate Losses:
Active Participation
Passive loss
limitations for rental real
estate generally apply to:
-
Leased
residential property
-
Leased
vacation homes if average
rental period is more than 7
days.
-
Leased
condos if average rental
period is greater than 7
days.
-
Leased
commercial buildings
-
Leased land
-
Mini-warehouses
-
Self-storage units
ISSUE: Does
the taxpayer actively
participate and does he qualify
for the $25,000 special
allowance under IRC § 469(i)?
____ Have
rental real estate losses been
limited to $25,000 (or up to
passive income from another
passive activity)? If not, limit
losses to $25,000, and continue
on to verify active
participation. If yes, continue
on to verify active
participation.
____ Is MAGI
more than $150,000? MAGI is
simply AGI computed without
rental losses and any other
passive losses and some minor
modifiers. If AGI is more than
$150,000, MAGI is almost always
more than $150,000. If AGI plus
the rental losses is more than
$150,000, MAGI is more than
$150,000.
____ Is the
taxpayer a limited partner
(and not also a general
partner)? See IRC §
469(i)(6)(B). Note: Since
many investors in low income
housing are limited partners,
losses will not qualify for the
active participation standard
and should be on line 3b.
Therefore, no $25,000 offset is
available. While LIHC are
excepted from the active
participation requirement, no
such exception exists for LIH
losses.
_____ Does
the taxpayer own less than 10
percent? See Schedule K-1.
_____ Are
losses from an activity other
than real estate?
Equipment, computers, boats,
vehicles, etc. Leases of
personal property are generally
passive regardless of the level
of participation See IRC §
469(c)(2)&(4).
If answers to
any of the last 3 questions are
answered YES, Taxpayer does not
qualify for $25,000 offset.
Loss should be moved to Line 3
of FORM 8582 and recomputed. In
effect, the loss will be
disallowed (unless there is
passive income from another
activity reported on F1040). If
all answers above are NO, verify
the taxpayer is actively
participating (making management
decisions relative to tenants,
terms, repairs) via a statement
or oral testimony. To be
actively participating, the
taxpayer must be making
management decisions in a bona
fide sense, not merely ratifying
an on-site manager's decisions.
CONCLUSION:
The taxpayer is/is not actively
participating. Ref. IRC §
469(i), Reg. § 1.469-1T(e)(3).
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