As we discussed here, real estate “professionals” get advantageous tax treatment under Section 469. While rental activities are de facto passive — meaning losses from such activities can only be deducted against passive income — losses generated by real estate professionals are not subject to these limitations. As we discussed in that previous post:
In order to qualify as a real estate professional, a taxpayer needs to pass two tests under Sec. 469(c)(7)(B),
(1) more than one half of the personal services performed by the taxpayer in all trades or businesses for the tax year must be performed in real estate trades or businesses in which the taxpayer materially participates (you must spend more hours on real estate activities than non-real estate activities), and
(2) the taxpayer must perform more than 750 hours of services during the taxable year in real property trades or businesses in which the taxpayer materially participates. (you must spend more than 750 hours in each real estate activity, unless you elect to group them in which case you must spend more than 750 hours on the combined real estate activities)
In discussing the hurdles in meeting these tests, we added:
The second test of Section 469(c)(7) – requiring the taxpayer to spend more than 750 hours per year in real property trades or business in which the taxpayer materially participates — poses a serious challenge. Absent an election to group the activities under Sec. 469(c)(7)(A), you will have to spend more than 750 hours in each rental activity.
Ordinarily, this election to group the activities — thereby reducing the taxpayer’s requirement to spend 750 hours in the combined activities, rather than each individual activity — is made by filing a statement with the taxpayer’s original income tax return for the taxable year. In the event the taxpayer failed to timely file the election, they would need to file a ruling request asking for 9100 relief and pay the appropriate user fee.
In several weeks, the IRS will publish Rev. Proc. 2011-34, which simplifies the procedure to receive late relief for an election to aggregate rental activities for qualifying taxpayers, while also allowing a taxpayer to retroactively aggregate their rental activities. In order to use the Rev. Proc., a real estate professional must meet the following requirements:
1. The taxpayer failed to make an election solely because the taxpayer failed to timely meet the requirements in §1.469-9(g);
2. The taxpayer filed consistently with having made an election on any return that would have been affected if the taxpayer had timely made the election.
3. The taxpayer timely filed each return that would have been affected by the election if it had been timely made. The taxpayer will be treated as having timely filed a required tax or information return if the return is filed within 6 months after its due date, excluding extensions;
4. The taxpayer has reasonable cause for its failure to meet the requirements in § 1.469-9(g).
Assuming these requirements are met, the taxpayer must do the following in order to be granted late relief:
- Attach the statement required by § 1.469-9(g)(3) to an amended return for the most recent tax year and mail the amended return to the IRS service center where the taxpayer will file its current year tax return.
- The statement must contain the information required on the original election under § 1.469-9(g)(3) and must explain the reason for the failure to file a timely election.
- The statement must identify the taxable year for which it seeks to make the late election.
- Finally, the statement must state at the top of the document “FILED PURSUANT TO REV. PROC. 2011-34.”
Any taxpayer receiving relief under this revenue procedure is treated as having made a timely election to treat all interests in rental real estate as a single rental real estate activity as of the taxable year for which the late election was requested.
Clearly, this will reduce the administrative burden of requesting a formal private letter ruling, but more importantly, it will allow taxpayers who failed t0 timely file the election to retroactively treat their rental activities as aggregated. This election to aggregate may well make the difference between qualifying and not qualifying as a real estate professional under the second mechanical test of Section 469(c)(7).