Discussion:Real estate pro --active vs. material participation
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| 17 August 2006 | |
| How do you determine active vs. material participation in a rental property for a real estate pro? This CA taxpayer has 5 rentals in HI. He has a paid manager there to collect the rents and oversee the properties. But, this is because of the distance. Do you look at the amount of time the real estate pro spent managing the property vs. the amount of time the paid manager spent? Do you look at the duties performed by each one? I know that the IRS says, "If there is paid management, it is a strong indicator taxpayer did not materially participate." | |
| 17 August 2006 | |
| If the taxpayer is meets the definition of a real estate professional, you must ignore the active participation rules, and instead, apply one of the 7 material participation standards. If the client has professional management, it would seem that only the 500 hour test or the facts and circumstances test is available.
It may be impossible to satisfy the 500 hour test on any particular property. In that case, it may be beneficial to make the aggregation election. However, you need to make sure that your client understands that the aggregation election applies for all tax purposes, including the "complete taxable disposition of a passive activity" rule. | |
| 17 August 2006 | |
| In the IRS "Passive Activity Loss ATG - Exhibit 2.4: Real Estate Professional," one of the conclusions for the IRS agent is:
"Taxpayer is a real estate professional, but did not materially participate in the following real estate activities:_________ He does, however, actively participate, making management decisions. Losses are entered on Form 8582 line 1a." How is the IRS agent determining active vs material participation? Is participating in the aggregate activity for 500 hours enough to outweigh the paid management? | |
| 17 August 2006 | |
| You are confusing active participation with material participation. The active participation rules apply only to rental real estate activities and take into account whether a management company is used. In the case of a real estate professional as defined in the code, his rental real estate activiites are not treated as rental real estate for purposes of Sec. 469, but instead, are treated like any other trade or business. The classification of a passive vs. nonpassive trade or business depends solely on the material participation rules, and does not depend on whether a management company is used. I doubt very seriously that your client can satisfy the material participation standards unless he makes the aggregation election. | |
Death&Taxes (talk|edits) said: | 17 August 2006 |
| Take Riley's admonition about aggregation to heart. Nothing worse than having passive losses that can't be accessed. | |
