b'Rental Income continued from page 36with different participation standards thanyears in which the taxpayer is not a realpassive.The burden is on the taxpayer to both real estate professionals and materialestate professional.When the election issubstantiate their activity qualifies as non-participation.The other differencesmade any previously suspended losses inpassive.Also, grouping real estate activities between real estate professionals andthe taxpayers rental real estate portfoliocan be advantageous for meeting the non-material participation criteria that ancan be totaled into one single activity andpassive criteria.For taxpayers who have individual can sum the hours spent bycan be used to offset future non-passivean extensive portfolio of rental properties, both spouses for material participationincome from the activity.Once all of thethe elimination of Net Investment Income but not for real estate professionals.Thetaxpayers real estate activities are groupedTax would be a significant tax benefit. regulations state work performed by theinto a single activity and if the groupSince this article is limited in scope you taxpayers spouse in a trade or business isis operating at an overall loss then theshould discuss your tax situation with treated as work performed by the taxpayerlosses can be used to offset income fromyour tax professionals to any potential tax under Treas. Reg.1.469-5T(f)(3) theother non-passive trades or businesses,opportunities.material participation regulations. assuming that the investor meets the two criteria to treat the grouped activityDisclaimer:Grouping Election as non-passive.Once an election is made, revoking the election can only be madeThe purpose of this article is to provide The material participation rules arewhen there is a material change in thebackground information regarding passive applied on a property-by-property basis10.taxpayers facts and circumstances.Whileactivity rules under IRC 469 and should Therefore, if the taxpayer doesnt meetthe regulations do not provide a definitivenot be relied upon as written tax advice. this standard for a particular propertyanswer as to what is a material change;theyThe rules under this section are very then that particular property remains astate a material change does not occur ifcomplex and your tax situation should passive activity.The solution available isan election is less advantageous to thebe discussed with your tax professionals to group all the rental properties into onetaxpayer in a particular year, or if there ison the application of these rules and how group and thereby eliminate the property- a break in the taxpayers status as a realthey apply to your tax situation.by-property standard of the materialestate professional. participation rules.The election to treatEndnotesall interests in rental real estate as a singleNet Investment Income Taxrental real estate activity is made by filing1IRC 469(e)(1)(A)(i)a statement with the taxpayers originalAn additional tax benefit to be considered2IRC 469(g)(1)(A)income tax return for the current tax year.by taxpayers is if it is possible to convert The grouping election allows the taxpayerpassive income to non-passive income is3IRC 469(c)(7)to combine their activity for all propertiesthe non- imposition of the net-investment4Treas. Reg.1.469-9(b)(4)for purposes of measuring their hourstax.This tax is in addition to the income5Treas. Reg.1.469-5T(f)(2)(ii)(B)spent in the activity.It should be noted thattax levied on passive income.The tax rate6Roberta Birdsong, et ux. V. Commissioner, TC a taxpayer can only group rental activitiesis 3.8% on incomes greater than $250,000Memo 2018-148for purposes of determining materialfor married filing jointly and $200,0007James R. Madler, et ux v. Commissioner, TC participation, meaning, other non-rentalfor single filers.The deductions fromMemo 1998-112 & Ronald I. Koenig, et ux v. trades or businesses cannot be groupedthe Net Investment Income Tax base areCommissioner, TC Memo 1998-215with rental activities.The statement mustvery limited and with the new state tax8Treas. Reg.1.469-5T(a)(1)state the taxpayer is a qualifying taxpayerdeduction, the taxpayer is limited to the9IRC469(i)and is making the election under IRC$10,000 limit for state and local income tax. 469(c)(7) to treat all rental real estate10 Treas. Reg.1.469-9(e)(1)activities as a single real estate activity.Summary andIt should also be noted that there is latePractical Applicationelection relief to taxpayers without anyDerrick Foote is the owner of Duner and user fees and the relief is automatic underThere are tax benefits to being treated asFoote a full-service CPA firms that is located Rev. Proc. 2011-34. a non-passive investor in real estate.Toin Irvine, California.He has been in public treat your real estate activities as non- accounting for almost 20 years and has Once an election is made to group allpassive, a taxpayer needs to meet the twospent most of his career with two National real estate activities into one group thecriteria mentioned above.An importanttop ten firms; RSM US, LLP and CBIZ, Inc. election is binding for the year the electioncomponent in demonstrating real estateOver the course of his career Derrick has is made and for all future years in whichactivities are non-passive is documentation.assisted clients with tax, auditing and the taxpayer is a qualifying real estateDocumentation is essential to demonstrateconsulting services. professional, even if there are interveninga taxpayers real estate activities are non-Points of InterestFall 2019Page 37'