Leveraging IRC 469 Real Estate Professional Rules for Individual Taxpayers: Avoiding Passive Loss Limitations

An often crucial aspect of tax planning for individuals with rental real estate is whether their rental activities meet the threshold by which the taxpayer can be classified as a “real estate professional” under the rules of IRC 469. For many individual taxpayers, having rental activities qualify for real estate professional designation can result in significant income tax savings through avoidance of passive loss limitations.

Real estate rental activities often create tax losses through depreciation while generating positive cash flow. However, the default tax treatment for real property rental income or loss is passive, and rental losses cannot be applied to offset nonpassive income. Rental activity deemed passive is subject to the net investment income tax (NIIT) for income amounts over the specified threshold.

Treasury has established several safe harbors for individual taxpayers to meet in avoiding passive treatment on rental income and loss. Although the safe harbors set forth bright-line tests, the determination of whether a taxpayer meets the threshold to quality as a real estate professional is a challenge for most tax advisers.

The existing regulations require that a taxpayer prove qualification as a real estate professional by identifying and grouping real estate rental activities and then by meeting the material participation thresholds for each activity or grouping.

The regulations provide seven tests to determine material participation. Tax advisers must thoroughly understand each of these tests to determine whether their client’s rental activity may qualify for real estate professional treatment.

Listen as our experienced panel provides a thorough and practical guide to the real estate professional rules for individual taxpayers with rental real estate activities.

1. Default passive income loss limitation rules under Section 469
2. When an individual taxpayer would want to be classified as a real estate professional
3. Determining whether a taxpayer is a “real estate professional”
4. Material participation tests
5. Section 1.469-9 grouping/aggregation election
6. Documentation requirements
7. Illustrations and examples

The panel will discuss these and other important questions:

• The default passive loss treatment for real estate income
• Grouping real estate rental activities
• Applying the material participation tests to individual or grouped real estate activities
• How the Sec. 1.469-9 aggregation election functions

Learning Objectives

After completing this course, you will be able to:

• Discern when an individual taxpayer would derive tax benefit from designation as a real estate professional
• Identify the safe harbor provisions for real estate professional status
• Recognize the requirements for real estate professional designation
• Determine whether a client’s activities meet the regulatory threshold for real estate professional status

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience at mid-level within the organization, preparing complex tax forms and schedules, supervising other preparers/accountants. The webinar assumes specific knowledge and understanding of the Section 469 Passive Activity Rules, the material participation rules, and familiarity with the Net Investment Income Tax (NIIT); general familiarity with the qualitative tests for determining whether a taxpayer qualifies as a real estate professional

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).