The IRS is allowing real estate professionals to make a late election a special procedure to aggregate rental real estate interests in applying the passive activity loss (PAL) rules. Provided this procedure is followed, the real estate professional will be eligible for an extension of time to file the so-called “Reg 1.469-9(g) election” to treat all rental real estate interests as a single activity.
Aggregating all rental real estate interests into one activity can provide a significant tax advantage. This new IRS procedure, of course, also points out that those taxpayers who do not qualify for tax-professional status face additional challenges in coordinating losses in connection with more than one real estate properties.
Losses from a passive activity can only offset income from another passive activity and cannot offset income from a nonpassive activity. These rules apply if the taxpayer does not materially participate in the activity. Rental real estate activities are treated as “per se” passive activities, meaning that they are automatically consider passive unless the taxpayer can prove material participation in the activity and the performance of qualifying services in real property trades or businesses (the hallmarks of a “qualifying taxpayer”). The rules to qualify are quite specific.
Ordinarily, the PAL rules apply as if each taxpayer interest in rental real estate were a separate activity. However, a taxpayer may elect to treat all interests in rental real estate as a single real estate activity, by filing a statement with the taxpayer’s original income tax return for the year.
The election is binding for the year in which it is made and for all future years, unless the taxpayer is not a qualifying taxpayer. A taxpayer can make the election in any year in which the taxpayer qualifies; not just the initial year of qualification. A taxpayer can revoke the election only if there is a material change in the taxpayer’s circumstances.
To obtain relief under the new procedure from an otherwise untimely election, representations must have “reasonable cause” for not making a timely election. The taxpayer must attach the statement to an amended return for the most recent tax year, explain the reason for the failure to file a timely election, and identify the year for which it is making a late election. Once the IRS approves the relief application, the taxpayer may then treat all interests in rental real estate as a single rental real estate activity for the year for which the election was made.
Rev. Proc. 2011-34