Discussion:Passive activity loss

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Discussion Forum Index --> Tax Questions --> Passive activity loss

Mr (talk|edits) said:

22 November 2005
OK Client owns a real estate dev firm--single member LLC. (Previously, he was working for a national firm that did REITs.) The firm is in its 2nd year of op and invests in a building downtown to convert it into condos and sell. It is a partnership with very large firms and will show loss for the first couple of years. His ownership is about 20% and is fairly active in the project. He's also been looking at many other deals.

Is this PAL and why?

Jmrmdcpa (talk|edits) said:

22 November 2005
Real estate rental is a passive activity, unless the partner/member qualifies under the "material participation" or "real estate professional" rules. Real estate development, however, is generally not a passive activity.

However with the project showing losses for the first couple of years, the owner of the single member LLC needs to be concerned about basis and at-risk limitations limiting his ability to use the flow-through losses. Generally flow-through debt allocated to LLC members does not provide ar-risk basis. The LLC member may need to be prepared to contribute more capital or to sign a deficit restoration obligation promising to make good on his deficit capital balance if he wants to preserve his ability to deduction flow-through losses.

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