Passive Activity Loss
Limitations
Video 2
Reviewing the rental exception and
material participation examples from the
regulations
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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
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What is a rental activity?

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§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)
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Rental exceptions
§1.469-1T(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.
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Rental exception examples
-1T(e)(3)(ii)
A. Average period of customer use < 7 days

No example provided in regs.
Average period of customer use < 30 days AND
significant personal services provided
B.

Examples 2 and 4
Average period of customer use > 30 days and
extraordinary personal services provided
C.

Examples 1 and 3
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More rental exception examples
Rental incidental to a non-rental activity
D.

Examples 5, 6 & 7
Property available during defined business
hours for nonexclusive use by various
customers
E.

Example 10
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
F.

Example 8
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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.
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Relevance of material participation


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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).
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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
–
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
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(A) regular,
(B) continuous, and
(C) substantial”
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Reg guidance on material participation
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-5 and -5T
IRS provides 7 possible tests and provides
examples for most
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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
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MP examples of the 7 tests
1.

2.
3.
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4.
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5.
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6.
7.
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> 500 hours
Example 1 & 2
Substantially all
Participation > 100 hours and is not less than participation of
any other individual
Example 3
Significant participation activity (SPA) and > 500 hours
Example 4
MP in any 5 prior tax years during prior 10 years
Example 5 & 6
Personal service activity and MP in any 3 prior tax years
Facts and circumstances
Example 8
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MP examples of what is proper
participation

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Example 7
Think of other examples on your own.
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