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 § T(e) and -1(e) Average period of customer use < 7 days Average period of customer use < 30 days AND significant personal services provided Average period of customer use > 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) A. Average period of customer use < 7 days  No example provided in regs. B. Average period of customer use < 30 days AND significant personal services provided  Examples 2 and 4 C. Average period of customer use > 30 days and extraordinary personal services provided  Examples 1 and 3

6 More rental exception examples D. Rental incidental to a non-rental activity  Examples 5, 6 & 7 E. Property available during defined business hours for nonexclusive use by various customers  Example 10 F. 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  Isn’t 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 1. > 500 hours 2. 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 3. Participation > 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; 4. Significant participation activity (SPA) and aggregate participation in all SPAs during year > 500 hours Prior Year MP Tests 5. MP in any 5 prior tax years (whether or not consecutive) during prior 10 years 6. Personal service activity and individual materially participated in the activity for any 3 prior tax years (whether or not consecutive) Facts and Circumstances Test 7. 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 1. > 500 hours  Example 1 & 2 2. Substantially all 3. Participation > 100 hours and is not less than participation of any other individual  Example 3 4. Significant participation activity (SPA) and > 500 hours  Example 4 5. MP in any 5 prior tax years during prior 10 years  Example 5 & 6 6. Personal service activity and MP in any 3 prior tax years 7. Facts and circumstances  Example 8

13 MP examples of what is proper participation Example 7 Think of other examples on your own.